CLWTAXN | LECTURE

Week 4, Day 1
Professor: Atty. Antonio Ligon
Room: AG - 707

TAXATION
- “The hardest thing in the world to understand in the income tax.” Albert Einstein
- “Today, it takes more brains and effort to make out the income tax form than it does to
make the income.” Alfred E. Neuman
- “A person doesnt know how much he has to be thankful for until he has to pay taxes on
it.” Anonymous

- The sovereign isnt required to pay income or capital gains taxes, but Queen Elizabeth had
been voluntarily doing so since 1993, according to the royal family’s website.

INCOME
- Realized inflow of wealth to the taxpayer in the form of cash or its equivalent, whether as
payment for services, interest, or profit from investment and not a mere return of capital.

INCOME TO BE TAXABLE
(1) There must be a gain or profit wheter in cash ot its equivalent
(2) The gain must be realized or received; and
(3) The gain must not be excluded by law or international treaty from taxation

INCOME TAX: DEFINITION

Income Tax is a tax on a person’s income, emoluments, profits arising from property,
practice of profession, conduct of trade or business or on the pertinent items of gross
income specified in the Tax Code of 1997 (Tax Code), as amended, less the deductions if
any, authorized for such types of income, by the Tax Code, as amended, or other special
laws.

INCOME CLASSIFICATION ACCOURDING TO SOURCE:

(1) Income from sources within the Philippines
(2) Income from without the Philippines
(3) Income from sources partly and partly without the Philippines

*Foreigners are not exempted in paying income taxes.

ARCILLA, Ma. Angelika | BS - LGL (ID:121)

PERSON OR ENTITIES SUBJECT TO INCOME TAXATION
(1) Individuals
(2) Corporations
(3) Estate & Trust

*Artificial entity: partnership, association, general professional partnership

I. Individuals
● Resident citizens receiving income from sources within or outside the Philippines
○ Employees deriving purely compensation income from two or more employers,
concurrently or successively at any time during the taxable year.
○ Employees deriving purely compensation income regardless of the amount,
whether from a single or several employers during the calendar year, the income
tax of which as not been withheld correctly (i.e. tax due is not equal to the tax
withheld) resulting to collectible or refundable return
○ Self-employed individuals receiving income from the conduct of trade or business
and/or practice of profession
○ Individuals deriving mixed income, i.e. compensation income and income from
the conduct of trade of business and/or practice of profession
○ Individuals deriving other non-business, non-professional related income in
addition to compensation income not otherwise subject to a final tax
○ Individuals receiving purely compensation income from a single employer,
although the income of which has been correctly withheld, but whose spouse is
not entitled to substituted filing.
● Non-resident citizens receiving income from sources within the Philippines
● Aliens, whether resident or not, receiving income from sources within the Philippines

II. Corporation
“Shall include one person corporation, partnerships, no matter how created or organized, joint
stock companies, joint accounts (cuentas en participación), association, or insurance companies,
but does not include general professional partnerships and a joint venture or consortium formed
for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal
and other energy operations pursuant to an operating consortium agreement under a service
contract with the Government.” (Sec. 2. A, Revenue Regulation 5-2-21, 8 April 2021)
● Corporations including partnerships, no matter how created or organized
● Domestic corporations receiving income from sources within and outside the Philippines
● Foreign corporations receiving income from sources within the Philippines

III. Estate and Trust engaged in trade or business

ARCILLA, Ma. Angelika | BS - LGL (ID:121)

 ● The property that a person leaves behind when they die is called the decedent’s state. The
decedent is the person who died. Their estate is the property they owned when they died.
● A trust is a legal relationship created (in lifetime, or on death) by a settlor when the assets
are placed under the control of a trustee for the benefit of a beneficiary, or for a specific
purpose.

TYPES OF TAXABLE INCOME

● Ordinary income - which consist of employee’s compensation; from trade, business, or
practice of a profession; gain from sale of ordinary assets, and net capital gain from sale
of “other capital assets”. This is reported in the Income Tax Return (ITR)
● Passive Income - is the earnings without any active action on the part of taxpayer.
Dividends, interest income in bank deposits are common examples.
● Capital Gains - which involve sale on real property classified as capital assets and shares
of domestic corporation (when seller is not dealer in securities).

CAPITAL vs. ORDINARY ASSETS

- Capital Assests are property held by the taxpayer (whether or not connected with his
trade or business), but does not include the following:
- Stock in trade of the taxpayer or other property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxable
year;
- Property held by the taxpayer primarily for sale to costumers in the ordinary
course of his trade or business;
- Property used in the trade or business, of a character which is subject to the
allowance for depreciation; and real property used in the trade or business of the
taxpayer.”
- Generally, properties not used in trade or business of the taxpayer.
- Ordinary Assests are properties used in trade or business or primarily held for sale by the
taxpayer.
(Sec. 39, NIRC)

Gross Income P xxx

Less: Allowable Deduction xx
Net Taxable Income P xxx

Multiply by the graduated tax rates

Income Tax Due P xxx

Less: Whatever Tax Withheld (per BIR Form 2316)

ARCILLA, Ma. Angelika | BS - LGL (ID:121)

Income Tax Payable 𝑃 𝑥𝑥𝑥

ITEMIZED DEDUCTION vs. OPTIONAL STANDARD DEDUCTION (OSD)

Under current tax law, OSD gives the taxpayer a choice of computing for tax-decutible expenses
at 40% of gross sales or receipts, if the taxpayer is an individual, or on gross income, if a
corporation. This is in lieu of itemizing expenses to be claimed as tax deductions.

Mr. T, a resident citizen, has a taxable income (net income) of P2,100,000.

How much is the income tax due?

On P2,000,000 — P402, 500.00

100,000 32,000.00
Income Tax Due P432, 500.00

2023 INDIVIDUAL’S GRADUATED INCOME TAX RATES

RANGE OF TAXABLE INCOME TAX DUE = a + (b * c)

OVER NOT OVER BASIC ADDITIONAL OF EXCESS

AMOUNT (a) RATE (b) OVER (c)

- 250,000.00 - -

- 400,000.00 - 20% 250,000.00

400,000.00 800,000.00 22,500.00 25% 400,000.00

800,000.00 2,000,000.00 102,500.00 30% 800,000

200,000,000.00 8,000,000.00 402,500.00 32% 2,000,000.00

8,000,000.00 - 2,202,500.00 35% 8,000,000.00

Effective January 1, 2023 onwards

SELF EMPLOYED INDIVIDUALS and/or PROFESSIONALS:

- Option to avail of an eight percent (8%) tax on gross sales or gross receipts and other
non-operating income in excess of P250,000 in lieu of the graduated income tax rates. If
the annual sales or receipts do not exceed P3,000,000.00.
- In case of self-emplloyed individuals and/or professionals availingof the eight percent
(8%) tax on gross sales or gross receipts and other non-operating income in excess of

ARCILLA, Ma. Angelika | BS - LGL (ID:121)

 Two Hundred Fifty Thousand pesos (P250,000) on lieu of the graduated income tax rates
in computation of the taxable income is:

Gross Sales/Receipts
Add: Income outside of the business operation
Gross taxable income
Less: (P250,000)
Net Taxable Income

Multiply by Tax Rate 8%

Income Tax Due
Less: Whatever Tax Withheld (per BIR Form 2307)

Income Tax Payable

===============================

Mr. P is a professional with gross receipts and non-operating income of P2,000,000, with cost
and expenses of P1,200,000

Computation based on graduated rate:

Gross receipts and non-operating income P2,000,000

Less: Cost and expenses P1,200,000
Taxable Income P 800,000

Income Tax due is 𝑃130, 000

Using the 8% Option

Compute the income tax:

Gross receipts and non-operating income P2,000,000

Less: Fixed deductions 250,000
Taxable Income P1,750,000

Income Tax at 8% 𝑃 140, 000

Choose whichever is advantageous to the self-employed professional

If the gross sales or receipts plus non operating income exceed P35, Tax will be at the graduate
rate:

ARCILLA, Ma. Angelika | BS - LGL (ID:121)

Mr. M is a professional with gross receipts and non-operating income of P4,000,000, with costs
and expenses of P3,000,000

Compute the income tax:

Gross receipts and non-operating income P4,000,000

Less: Cost and expenses P3,000,000
Taxable Income P1,000,000

Income Tax at graduated rate P 130,000

30%(1,000,000 - 800,000) 60,000
𝑃 190, 000

Husband and wife shall compute separately their individual income tax based on their respective
total taxable income. Married individuals, whether citizens, residents or non-resident aliens, who
do not derive income purely from compensation, shall file a return for the taxable year to include
the income of both spouses, but where it is impracticable for the for the spouses to file one
return, each spouse may file a separate return of income, but the returns so filed shall be
consolidated by the Bureau for purposes of verification for the taxable year.

Composition of the Gross Income. All income derived from whatever source, included (but not
limited to) the following items:
1. Compensation for services in whatever form paid, including, but not limiting to fees,
salaries, wages, commissions, and similar items;
2. Gross income derived from the conduct of trade or business or the exercise of a
profession;
3. Gains derived from dealings in property;
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings;
10. Pensions; and
11. Partner’s distributive share from the net income of the general professional partnership

Exclusion from Gross Income

1. Proceeds of life insurance policies;
2. Amount received by insured as return of premium;

ARCILLA, Ma. Angelika | BS - LGL (ID:121)

 3. Gifts, bequests, and devises;
4. Compensation for injuries of sickeness, income exempt under treaty retirement benefits,
pensions, and gratuities, etc;
5. Income derived by the government or its political subdivisions; prizes and awards
exempted by law;
6. Prizes and awards in sport competition;
7. 13th months’ pay and other benefits subject to the P90,000 limit;
8. GSIS, SSS, Medicare, and other contributions;
9. Gains from sale of bonds, debentures, or other certificate of indebtedness with a maturity
of more than 5 years.
10. Gains from redemption of shares in mutual funds.

Tax-exempt Income
The first P250,000 in taxable income of compensation earners is exempted from personal income
tax;

Allowable deductions from gross income may either be:

a. *Operational Standard Deduction - an amount not exceeding 40% of the gross
sales/receipts for individual and gross income for corporations; or
b. Itemized Deductions - which include the following:
i. Expenses
ii. Interest
iii. Taxes
iv. Losses
v. Bad debts
vi. Depreciation
vii. Depletion of oil and gas wells and mines
viii. Charitable Contributions and other contributions - research and development
ix. Pension trust
x. Not allowed to non-residents alien individuals
*A General Professional Partnership (GPP) may avail of the OSD only once, either by the GPP
or the partners comprising the partnership.

Mr. CEO is a part time employee, with his own practice as CPA by the side. His income for 2022
are as follows:

Gross receipts from practice of profession - P4,400,000

Expenses on the practice of profession - P1,300,000
Gross compensation as CEO - P6,000,000
Tax due: (using 40% OSD)

ARCILLA, Ma. Angelika | BS - LGL (ID:121)

Gross Income P4,400,000
Less: 40% of P4,400,000 (1,760,000)
Taxable Income P2,640,000

Income Tax using graduated rate P 694,800

Add: Tax on Compensation Income P1,770,000
Total income tax due 𝑃2, 464, 800

PASSIVE INCOME TAX RATE

1. Interest from currency deposits, trust 20%

funds and deposit substitutes

2. Royalties (on books as well as literary 10%

& musical compositions)
- In general 20%

3. Prizes (P10,000 or less) Graduated Income Tax Rates

- Over P10,000 20%

4. Winnings (except from PCSO and 20%

Lotto amounting to P10,000 or less)

- From PCSO and Lotto amounting to exempt

P10,000 or less

5. Interest income from a Depository 15%

Bank under the Expanded Foreign
Currency Deposit System

6. Cash and/or property dividends 10%

received by an individual from a
domestic corporation/joint stock
company/insurance or mutual fund
companies/regional operating
headquarter of multinational
companies

ARCILLA, Ma. Angelika | BS - LGL (ID:121)

 7. Share of an individual in the 10%
distributable net income after tax of a
partnership (except GPPs)/association,
a joint account, a joint venture or
consortium taxable as corporation of
which he is a member or co-venture

8. Capital gains from sales, exchange or 6%

other disposition of real property
located in the Philippines, classified as
capital asset

9. Net Capital gains from sales of stock 15%

not traded in the stock exchange

10. Interest Income from long-term Exempt

deposit or investment in the form of
savings, common or individual trust
funds, deposit substitutes, investment
management account and other
investments evidenced by certificates
in such form prescribed by the Bank
Sentral ng Pilipinas (BSP) upon
pre-termination before the fifth year,
there should be imposed on the entire
income from the proceeds of the long
term deposit based on the remaining
maturity thereof:

Holding Period
- Four (4) years to less than five (5) - 5%
years - 12%
- Three (3) years to less than four (4) - 20%
years
- Less than three (3) years

Overseas Filipino Woker, including overseas seaman

An individual citizen of the Philippines who is working and deriving income from abroad as an
overseas Filipino worker is taxable only on income from sources within the Philippines;
provided further, that a seaman who is a citizen of the Philippines and who receives
compensation for services rendered abroad as a member of the complement of a vessel engaged
exclusively in the international trade will be treated as an overseas Filipino worker.
A Filipino employed as Philippine Embasy/Consulate service personnel of the Philippine
Embassy/consulate is not treated as non-resident; hence his income is taxable.

ARCILLA, Ma. Angelika | BS - LGL (ID:121)

WHO ARE NOT REQUIRED TO FILE INCOME TAX RETURNS?

A. An individual earning purely compensation whose taxable income does not exceed
P250,000.00
i. An individual whose income tax has been withheld correctly by his employer, provided
that such individual has only one employer for the taxable year.
ii. A citizen of the Philippines who work and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time during
the taxable year.
iii. A citizen who has been previously considered as a non-resident citizen and who
arrives in the Philippines at any time during the year to reside permanently in the
Philippines will likewise be treated as a non-resident citizen during 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.
B. Overseas Filipino Worker, including overseas seaman
An individual citizen of the Philippines who is working and deriving income from abroad
as an overseas Filipino worker is taxable only on income from sources within the
Philippines; provided that a seaman who is a citizen of the Philippines and who receives
compensation for services abroad as a member of the complement of a vessel engaged
exclusively in international trade will be treated as an overseas Filipino worker.
NOTE: A Filipino employed as Philippine Embassy/Consulate service personnel of the
Philippines Embassy/Consulate is not treated as a non-resident citizen; hence, his income
is taxable.
C. General Professional Partnership
D. Government Services Insurance System (GSIS)
E. Social Security System (SSS)
F. Philippine Health Insurance Corporation (PHIC)
G. Local Water Districts (LWD)

HOW IS INCOME TAX PAYABLE OF INDIVIDUALS (RESIDENT CITIZENS AND

NON-RESIDENT CITIZENS) COMPUTED?

A. Based on Graduated Income Tax Rate

Gross Income P xxx
Less: Allowable Deductions (Itemized or Optional) P xxx
Net Taxable Income P xxx
Multiply by Tax Rate (0% to 35%) P xxx
Income Tax Due P xxx
Less: Tax Withheld (per BIR Form 2316) P xxx
Income Tax Payable P xxx

ARCILLA, Ma. Angelika | BS - LGL (ID:121)

 B. Based on Preferential Tax Rate of 8%
i. Taxpayers source of income is purely from self-employement

Gross Sales/Receipts P xxx

Add: Non-operating Income P xxx
Gross Taxable Income P xxx
Less: Amount allowed as deduction under P250,000.00
Sec. 24 (A)(2)(b) of NIRC, as amended
Net Taxable Income P xxx
Multiply by Tax Rate 8%
Income Tax Due P xxx
Tax Withheld (per BIR Form 2307) P xxx
Income Tax Payable P xxx

ii. Mixed Income Earner

(On compensation)
Total Compensation Income P xxx
Less: Non-taxable Income P xxx
13th month pay and other benefits (max) P90,000.00
Taxable Compensation Income P xxx
Multiply by Tax Rate (0% to 35%) P xxx
Tax Due to Compensation P xxx

(On Business Income)

Gross Sales/Receipts P xxx
Add: Non-operating Income P xxx
Taxable Business Income P xxx
Multiply by Tax Rate 8%
Tax Due on Business Income P xxx

Total Income Tax Due (Compensation + Business) P xxx

Tax Withheld (per BIR Form 2316/2307) P xxx
Income Tax Payable P xxx

CORPORATION
Definition under the Revised Corporation Code (RCC)

ARCILLA, Ma. Angelika | BS - LGL (ID:121)

“A corporation is an artificial being created by operation of law, having the right of succession
and the powers, attributes, and properties expressly authorized by law or incidental to its
existence.” Sec. 2 RCC
Corporation under NIRC
“Shall include one person corporation, partnerships, no matter ow created or organized, joint
stock companies, joint accounts (cuentas en participación), association, or insurance companies,
but does not include general professional partnerships and a joint venture or consortium formed
for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal
and other energy operations pursuant to an operating consortium agreement under a service
contract with the Government.” Sec. 2 A, Revenue Regulation 5-2-21, 8 April 2021

GENERAL PROFESSIONAL PARTNERSHIPS:

- Are partnerships formed by persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from engaging in any trade or
business.
- Not considered a corporation
- Not subject to income tax
- Individual partner’s share is subject to individual income tax rate

DETERMINING RESIDENCE OF INCORPORATED BUSINESS

The incorporation test is used in determining the residence of incorporated business for
Philippine taxation purposes.
A corporation organized under Philppine laws is a domestic corporation, corporation organized
under the laws of a foreign country is a foreign corporation.
A foreign corporation doing business in the Philippines (for example, through a branch) is
considered a resident foreign corporation.
A non-resident foreign corporation refers to a foreign corporation not engaged in trade or
business within the Philippines.

For income tax purposes, domestic corporations are taxed on their worldwide income; foreign
corporations are taxed only on their Philippine sourced-income. Income tax of domestic and
resident foreign corporations is based on their taxable income, or gross income less allowable
deductions. Non-resident foreign corporations are taxed on their gross income, without
deduction.

The corporate income tax rate is 25% and the imposition of the minimum corporate income tax
(MCIT) 1% until 30 June 2023.
A lower corporate income tax of 20% is also provided for domestic corporations with net taxable
income not exceeding P5 million and with total assets not exceeding P100 million, excluding

ARCILLA, Ma. Angelika | BS - LGL (ID:121)

land on which the corporation’s office, plant and equipment are situated during the taxable year
for which the tax is imposed.
When corporations declare dividends to their shareholders, or profits to their partners, in the case
of partnerships that are considered corporations, these dividends and profits are again taxed at
the shareholder - or partner - level.
Individual shareholder are partners are generally subject to a 10% final tax on dividends.
Dividends declared by a domestic corporation to another domestic corporation or to a resident
foreign corporation are not subject to income tax.

DOMESTIC CORPORATION
The following corporate income tax (CIT) rates apply to domestic corporations:

INCOME CIT rate

In general, on net income from all sources 25%

On net income from all sources of domestic 20%

corporations with total assets not exceeding
P100 million pesos and total net taxable
income not exceeding P5 million pesos

Minimum corporate income tax (MCIT) on gross income, beginning in the fourth taxable year
following the year of commencement of business operations.
MCIT is imposed where the CIT at 25% is less then 1% MCIT on gross income.

Propriety educational institutions and 10%

hospitals that are non-profit, or net income if
gross income from unrelated trade, business,
and other activities does not exceed 50% of
the total gross income from all sources.

Non-stock, non-profit educational institutions Exempt

(all assets and revenue used actually, directly,
and exclusively for educational purposes) and
other non-profit organizations

For Domestic Corporations

PASSIVE INCOME of CORPORATION TAX RATE

ARCILLA, Ma. Angelika | BS - LGL (ID:121)

 Intrest from currency deposits, trust funds, 20%
deposit substitute and similar arrangements
received by domestic corporations

Royalties from sources within the Philippines 20%

Interest Income from a Depository Bank 15%

under Expanded Foreign Currency Deposit
System

Cash and Property Dividends received by a 0%

domestic corporations from another domestic
corporation

Capital gains from the sale, exchange or other 6%

disposition of lands and/or building

Net Capital gains from sale of shares of stock 15%

not traded in the stock exchange.

SUMMARY: Taxpayer as individual

What are the three categories of taxable income and the tax rates?
A. Capital Gain with Capital Gain Tax
a. Real Property classified as capital asset locate in the Philippines whichever is
higher between Selling Price or Fair Market Value 6%
B. Net Capital Gains from Sale of Share of Stock not traded in the stock exchange 15%
b. Passive Income - when the taxpayer merely waits for it to be realized

INCOME (INDIVIDUALS)
Items of Income Resident Non-resident Resident Engaged Not Engaged
Citizen Citizens Alien (Non-Resident (Non-Resident
Alient) Alien)

On net capital gain on Final Tax Final Tax of Final Final Tax of Final Tax 15%
sale of shares of stock of 15% 15% Tax of 15%
of domestic 15%
corporations classified
as capital asset not
listed and traded in a
local stock exchange:

On the gross selling Final Tax Final Tax of Final Final Tax on Final Tax 6%
price or fair market of 6% 6% Tax of 6%
value, whichever is 6%
higher, at the time of

ARCILLA, Ma. Angelika | BS - LGL (ID:121)

sale of real property
classified as capital
asset in the Philippines

From within the Final Tax Exempt Final Exempt Exempt

Philippines: On interest of 15% Tax of
on foreign currency 15%
deposits under the
expanded foreign
currency deposits
system

From within the Final Tax Final Tax of Final Final Tax of Final Tax of
Philippines: On interest of 20% 20% Tax of 20% 25%
on bank deposit, yield 20%
or other monetary
benefit from deposit
substitute, trust fund
and similar
arrangement

From within the Exempt Exempt Exempt Exempt

Philippines. On interest
on long-term deposit or
investment in banks
with maturity of 5 years
or more

From within the Final Tax Final Tax of Final Final Tax of
Philippines: On of 10% 10% Tax of 10%
royalties from books, 10%
literary works and
musical compositions

From within the Final Tax Final Tax of Final Final Tax of
Philippines: On other of 20% 20% Tax of 20%
royalties, prizes 20%
exceeding P10,000 and
other winning,
including PCSO
sweepstakes and lotto
winning more than
P10,000

From within the Final Tax Final Tax on Final Final Tax of
Philippines: On of 10% 10% Tax of 20%
dividend from domestic 10%

ARCILLA, Ma. Angelika | BS - LGL (ID:121)

 corporation, or from a
joint stock company,
insurance or mutual
fund company, and
regional operating
headquarters of
multinational company,
or share in the
distributive net income
after tax of a
partnership (except a
general professional
partnership), joint stock
or joint venture or
consortium taxable as
corporation

On other income from 0% to 0% to 35% 0% to 0% to 35%

within the Philippines 35% 35%

On gross income from 0% to 0% to 35% 0% to 0% to 35%

within the Philippines 35% 35%

ADDITIONAL INFORMATION
Partnership Definition
ARTICLE 1767. By the contract of partnership two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing the
profits among themselves.

Two or more persons may also form a partnership for the exercise of a profession.
(1665a)

Types of Partnerships:
1. Partnership in trade/ business
2. General professional partnership - neither an individual, corporation, or estate and trust
therefore exempted from paying income tax by provision of law.

MORE EXAMPLES
Graduated Rate:
Gross Income P2,500,000.00
Less: OSD (40%) (1,000,000.00)

ARCILLA, Ma. Angelika | BS - LGL (ID:121)

Net Income 1,500,000.00 (double underline)
Computation of Income Tax: First P800,000.00 102, 500.00
Excess of P700,000.00 @ 30%
P1,500,000.00 (double underline)

Gross Income: P2,500,000.00

Less: 250,000.00
Net Income: 2,250,000.00
8% Optional income Tax Rate 8%x
P 180,000.00

Net Income P700,000.00

First P400,000.00
Excess of
P 97,200.00

OSD = Operating Standard Deduction

Section 26, NIRC

ARCILLA, Ma. Angelika | BS - LGL (ID:121)