Classification OF Individual Taxpayers PDF

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Individual taxpayers are natural persons with income derived from within the territorial
jurisdiction of a taxing authority. Under the NIRC, individual taxpayers are classified as follows:...

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CLASSIFICATION OF INDIVIDUAL TAXPAYERS Individual taxpayers are natural persons with income derived from within the territorial jurisdiction of a taxing authority. Under the NIRC, individual taxpayers are classified as follows:

Individual taxpayers can be classified into two major categories – citizens and aliens. A Filipino Citizen, as defined under Section 1 Article III of the Philippine Constitution, is a natural person who is/has (a) born (by birth) with father and/or mother as Filipino Citizens; (b) born before January 17, 1973 of Filipino mother who elects Philippine citizenship upon reaching the age of majority; and (c) acquired Philippine citizenship after birth (naturalized) in accordance with Philippine Laws. An Alien, for Philippine taxation purposes, is a foreign-born individual from countries other than the Philippines and is not qualified to acquire or have not acquired Philippine Citizenship by birth or even after birth. Classification of Citizens 1. A Resident Citizen (RC) is a Filipino Citizen permanently residing in the Philippines or is temporarily staying outside the Philippines for less than 183 days during the taxable year.

RCs are taxable for all income derived from sources within and without the Philippines.

2. A Non-Resident Citizen (NRC) is a Filipino Citizen described under Sec. 22 (e) of the NIRC as someone who have stayed outside the Philippines for one hundred eighty-three days (183) or more during the taxable year (in aggregate) and has established proof to the CIR’s satisfaction of his intention to permanently reside abroad as an immigrant or employee.

Overseas Contract Workers (OCWs) or commonly referred to as Overseas Filipino Workers (OFWs) are classified as nonresident citizens for tax purposes as they are employed in foreign countries and are physically present in that foreign country because of such employment. This also covers seafarers or seaman, Filipino citizens, who receive compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively for international trade. NRCs are taxable only for income derived from sources within the Philippines. If a non-resident citizen arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines, that NRC is considered a nonresident citizen with respect to income earned from sources abroad until the date of his arrival in the Philippines. [Section 22(e)(4) NIRC].

The same rule shall apply to a resident citizen who leaves the Philippines anytime during the year as an immigrant or employee for more than 183 days.

Classification of Aliens 1. A Resident Alien (RA) is an individual who is not a citizen of the Philippines but whose residence is within the Philippines. RAs also include foreign individuals who have stayed in the Philippines for more than one (1) year upon date of arrival or who is required to stay for an extended period for the accomplishment of a purpose or project making a temporary home in the Philippines. A foreigner with no definite intention as to his stay is also considered a resident alien.

2. A Non-resident Alien (NRA) is an individual who is not a citizen and a resident in the Philippines. They are aliens who come to the Philippines for a definite purpose, which in its nature may be promptly accomplished.

Under Sec 22 (g) of the NIRC, NRAs are further classified as follows: 1. Non-resident alien engaged in trade or business (NRAe) is an NRA who derives business income in the Philippines and is staying in the Philippines for an aggregate period or more than 180 days during the taxable year but less than a year. 1. Non-resident alien not engaged in trade or business (NRAne) is an NRA who stayed in the Philippines for only 180 days or less, and he is not deriving business income in the Philippines.

Aliens, whether resident or not of the Philippines, is taxable only for income derived from sources within the Philippines.

CLASSIFICATION OF INCOME Income as to Territorial Source It is important to know the territorial source of income for tax purposes. There are two major income classification as to territorial source namely - income derived from within and income derived outside (without) the Philippines. Income from sources within comprises of earnings from within the Philippine territory. As a rule, if income is derived within the Philippines, it is taxable within. Income without the Philippines refers to income earned outside the Philippines or income derived from foreign countries. Income derived outside the Philippines is taxable only if the taxpayer is a Resident Citizen or Domestic Corporation. As discussed, each individual taxpayer is taxed on their income within and without as follows: Individual Taxpayer

Taxable Income Source

RC

Within & Without

NRC, RA, NRAe, NRAne

Within only

Income as to source Gross income (GI) refers to income from whatever source, derived within or without the Philippines, legal or illegal. Income refers to all earnings derived from service rendered (labor), from capital (business or investment), or both, including gain derived from sale or exchange of personal property as either ordinary or capital asset. (RR 2 Sec. 56)

Income as to taxability Income can also be taxable and non-taxable. Taxable income refers to all pertinent items of gross income specified in the tax code. Non- taxable income is the income mandated by the constitution, general or special laws and international agreements to be exempted from tax.

In a broad sense, income tax due for individuals is computed as:

The applicable income tax rate differs depending on the classification of individual taxpayers and the classification of income based on source, whether it is an ordinary income, passive income, or capital gains.

ORDINARY INCOME

Ordinary or regular income are subject to graduated tax table (also known as basic or normal tax) as provided for under Section 24(A) of the Tax Code. The revised graduated tax rate is summarized in Table 1-1.

TABLE 1.1 GRADUATED TAX RATES TRAIN LAW – TAXABLE YR 2018 - 2020 Amount of Income Not over P250,000 Over P250,000 but not over P400,000

Tax

Tax

Exempt

Exempt

20% of excess over P250,000

Over P400,000 but not over P800,000

P30,000 + 25% in excess of

Over P800,000 but not over

P130,000 + 30% in excess of

P2,000,000 Over P2,000,000 but not over P8,000,000 Over P8,000,000

2023 Onwards

P400,000

P800,000

15% of excess over P250,000 P22,500 + 20% in excess of P400,000 P102,500 + 25% in excess of P800,000

P490,000 + 32% in excess of P2,000,000

P402,500 + 30% in excess of P2,000,000

P2,410,000 + 35% in excess P8,000,000

P2,202,500 + 35% in excess of P8,000,000

PASSIVE INCOME Passive income from sources within the Philippines are subject to final withholding taxes as enumerated under Section 24(B) of the Tax Code. These passive incomes are not subject to graduated tax rate or basic tax presented in Table 1-1 but to specific final withholding tax rates as summarized in Table 1-2. Final taxes are “constituted as full and final payment” of the income tax due thus it is not creditable against any tax of the payee on income subject to regular rates of tax for the taxable year. Because it is not subject to basic income tax rates, income subjected to final tax is not included in the income tax return.

The liability for remittance of final taxes rests with the income payor as a withholding agent. In the case where the income payor fails to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor/withholding agent and the expense associated with the payment may not be allowed as deduction in the computation of income tax. Passive incomes derived abroad are subject to basic income tax, therefore, included in the income tax return of resident citizen taxpayers. TABLE 1.2 PASSIVE INCOME FROM PHILIPPINE SOURCES SUBJECT TO FWT Passive Income

Citizens & Residents

NRAe

NRAne

Interest from any currency bank deposit

20%

20%

25%

Yield or any other monetary benefit from Deposit Substitutes

20%

20%

25%

Yield or any other monetary benefit from trusts funds and similar agreements

20%

20%

25%

15% except NRCExempt

Exempt

Exempt

Exempt

Exempt

Exempt

4 years to less than 5 years

5%

5%

5%

3 years to less than 4 years

12%

12%

25%

Less than 3 years

20%

20%

25%

Royalties on books, as well as other literary works and musical compositions

10%

10%

25%

Royalties, in general

20%

20%

25%

Interest

Interest incomes received from a Depository bank under eFCDS (Beginning 2018) Interest income from long-term deposit or investment If pre-terminated before fifth year, a final tax shall be imposed based on remaining maturity as follows:

Royalties

Prizes

Prizes exceeding 10,000*

20%

20%

25%

20%

20%

25%

Exempt

Exempt

25%

20%

Exempt

25%

From domestic corporation or from a joint stock co., insurance, or mutual fund companies & ROHQ of multinational companies

10%

20%

25%

Net income after tax of a partnership (except a GPP)

10%

20%

25%

Share of an individual in the net income after tax of an association, a joint account, or a Joint Venture or Consortium taxable as a corporation, which he is a member or a co-

10%

20%

25%

Winnings Other winning regardless of amount PCSO/Lotto Winnings Amount is 10,000 or less Amount is more than 10,000 Dividends

venturer

Prizes less than 10,000 are subject to basic tax except those received by NRANETB which are subject to 25% FWT.

CAPITAL GAINS Capital gains refer to income from the sale of capital assets. Capital assets are assets not used or for sale in the ordinary course of business. Income from sale of capital assets subject to capital gains tax (CGT) under Table 1-3. Capital asset transactions subject to CGT are as follows: 1. Sale of shares of stocks of a domestic corporation not listed in the local stock exchange 2. Sale of real properties located in the Philippines

If capital gains arise from transactions other than those described these should be treated as ordinary income and subject to graduated income tax. Ordinary assets, on the other hand, subject to graduated income tax includes: 1. 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 taxable year. 2. Property used in trade or business subject to depreciation. 3. Real property held by the taxpayer primarily for sale to customers in the ordinary course of trade or business. 4. Real property used in trade or business of the taxpayer There are also capital gains not subject to CGT. These includes:

1. Sale of shares and foreign corporations 2. Sale of real properties located abroad 3. Sale of other personal assets other than shares of stock of domestic corporations such as cars, jewelries, and the like.

TABLE 1.3 CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX (CGT) (1) Capital gain from sale of shares of stock of a domestic corporation not traded in the local stock exchange (LSE)

Citizens & NRAe NRAne Residents

Beginning January 1, 2018 15%

15%

15%

On 1st Php100,000 capital gain

5%

5%

5%

In excess of Php100,000 capital gain

10%

10%

10%

(2) Capital gain on sale of real property located in the Philippines

6%

6%

6%

Tax Base: Capital Gain Prior to 2018

Tax Base: Selling Price or FMV, whichever is higher

Sale of Share of Stock of a Domestic Corporation not traded in the LSE Capital gain or loss is computed as fair market value less cost. According to RR 20-2020 amending RR 6-2008, the fair market value of a stock of a domestic corporation not sold through the local exchange shall be as follows:

Common Stock (CS)

Book value (BV) based on the latest available FS duly certified by an independent CPA prior to date of sale but not earlier than the immediately preceding taxable year.

Preferred Stock (PS)

Liquidation value (LV) , which is equal to the redemption price as of balance sheet date nearest to the transaction date, including any premium and cumulative preferred dividends in arrears.

Corporation has both common and preferred stocks

BV per CS = (Total Equity – LV of PS) / Total Outstanding CS All values to be used is as of balance sheet date nearest to the transaction date.

No CGT shall be due if the transaction resulted to a capital loss.

Sale of Real Property classified as Capital Asset within the Philippines FMV or fair market value refers to the higher of 1. Assessed value as provided by City or Provincial assessors as reflected in the tax declaration for real property tax purposes; and

2. Zonal value as provided by the Commissioner of Internal Revenue (CIR) which can be checked in BIR website. If the real property classified as capital asset is sold to the government, the individual taxpayer shall have the option to be taxed at 6% CGT or basic income tax using the graduated tax rate. If the real property sold is classified as principal residence, it may be exempt from CGT provided the requisites for exemption are met 1. The proceeds are fully utilized in acquiring or constructing a new principal residence within 18 months from the date of sale. If there is no full utilization, the unutilized portion of the gain shall be subject to CGT computed as follows: Taxable Amount = (Unutilized Portion/ Gross Selling Price) x GSP or FMV at time of sale, whichever is higher 2. The historical cost or adjusted basis of the real property sold shall be carried over to the new principal residence built or acquired. 3. The BIR shall have been duly notified by the taxpayer within 30 days from the date of sale through a prescribed return of his intention to avail of tax exemption. 4. The tax exemption can only be availed of once every 10 years. Principal residence is where the individual taxpayer permanently resides or whenever absent, wherein the said individual intends to return (RR 142000) and is considered is family home. It should be certified by the Barangay Chairman over the place, or the Building Administrator if the residence is a condominium or the individual taxpayer’s address as indicated in his latest tax return.

SUMMARY TYPE OF INCOME

APPLICABLE TAX

REFER TO

Regular Income

Graduated Tax

Table 1-1

Passive Income

Final Withholding Tax

Table 1-2

Capital Gains

Capital Gains Tax

Table 1-3

Note that income not subject to FWT or CGT are classified as ordinary income and are subject to graduated tax rate unless otherwise, exempt under the law. Interest income from bank deposit abroad, for instance, is not included in the list of income subject to FWT nor CGT. Hence, such income is subject to basic tax or graduated tax rate.

Other Stock Transaction Sale of shares of stock of a corporation listed in the local stock exchange is not subject to income tax but to other percentage tax which is further discussed under Tax 2 Business and Transfer Taxes. The applicable business tax for this type of transaction is known as "stock transaction tax". The tax rate is based on gross selling price; thus, stock transaction tax is computed regardless of whether the transaction resulted to a gain or loss.

Stock transaction tax (STT) is computed as follows: Prior to 2018

=

½ of 1% of Gross Selling Price

Beginning 2018

=

6/10 of 1% of Gross Selling Price

In a broad sense, computing for income tax due is as easy as

Gross taxable income or Tax Base Tax Rate

Php xx.xx xx%

Income Tax Due

Php xx.xx

Less: Tax Credits

(xx.xx)

Income Tax Due and Payable

Php xx.xx

We are done with determining the taxable income and applicable tax rate. Let us now compute for the tax due. Types of Individual Taxpayers according to Type of Income Earned 1. Purely Compensation Income Earner – individuals earning income from an employer-employee relationship which may be a minimum wage or non-minimum wage earner. Taxable Compensation Income (TCI) Tax Due (TCI*Graduated Tax Rate per Table 1.1) Less: Creditable withholding tax on compensation income

Php xx.xx xx.xx (xx.xx)

Income Tax Payable

Php xx.xx

Compensation income encompasses all remuneration for services performed by an employee for his employer whether paid in cash or in kind. (RR 2-98, as amended) Taxable compensation income excludes non-taxable compensation/ exclusions from total compensation income. Total compensation income This may include payments by employer such as but not limited to Salaries and Wages • Emoluments •

Honoraria • Bonuses • Allowances (transportation, representation, and entertainment) • Paid Vacation and Sick Leaves

•

Fees • Fringe Benefits

•

Pensions and Retirement Pay • Commission of Sales Personnel • Profit Sharing as compensation for service

•

•

Any other income payment arising from an employee-employer relationship

Exclusions Exclusions are flow of wealth to the taxpayer considered not part of income due to 1. Exemption under law 2. It does not come within the definition of income for income tax purposes. The following are considered non-taxable compensation and thus, are excluded in computing for the taxable compensation: • •

• •

SSS/ GSIS, PHIC, HDMF and union dues Compensation for Sickness and Injuries – amounts received by the employee through an Accident and Health Insurance or Workmen’s Compensation Act as compensation for injuries and sickness Retirement Benefits, pensions, and gratuities 13th month pay and other benefits – benefits received by employees provided that the exclusion shall not exceed Php90,000 (beginning January 1, 2018), 13th month pay and other benefits and bonuses in excess of Php90,000 shall form part of the taxable income.

o

Benefits received pursuant to RA 6686 “An Act Authorizing Annual Christmas Bonus to National and Local Government Officials and Employees

Benefits received pursuant to PD 851 “13th Month Pay Law” o Benefits received not covered by PD 851 o Other benefits such as productivity bonuses and incentives and Christmas Bonus De Minimis Benefits – privileges of relatively small value offered by employers to employees. These are not considered as compensati...