Comprehensive Study Guide: Individual Income Taxation in the Philippines

(Updated for the TRAIN Law and the Ease of Paying Taxes Act - EOPTA / RA 11976)

Module 1: Overview & Classification of Individual Taxpayers

1. General Definition
Individual Taxpayers are natural persons with income derived from within the territorial
jurisdiction of a taxing authority. Under RA 8424 (National Internal Revenue Code or
NIRC), as amended, individual taxpayers are classified based on citizenship, residence,
and the nature of their economic activities.

2. Importance of Taxpayer Classification

How a taxpayer is classified determines:
​ Situs of income (where the income is earned and whether it is taxable in the
Philippines).
​ Manner of computing tax (Gross income vs. Net income).
​ Treatment of passive incomes (Final Withholding Taxes vs. Basic Tax).
​ Allowable deductions (Business expenses vs. no deductions for compensation
earners).
​ Specific references and provisions applicable in the Tax Code.

3. Classification Based on Source and Residence

Individual taxpayers are categorized into five primary classes, along with specialized
subcategories:
​ Resident Citizens (RC)
​ Nonresident Citizens (NRC)
​ Resident Aliens (RA)
​ Nonresident Aliens (NRA):
​ Engaged in Trade or Business (NRA-ETB)
​ Not Engaged in Trade or Business (NRA-NETB)
​ Special Categories: Alien individuals employed by Philippine Offshore Gaming
Operators (POGOs) and/or Offshore Gaming Licensees (OGLs).

4. Classification for Responsive Tax Administration (Sec. 21(B) as amended by

EOPTA)
For administrative purposes, taxpayers are scaled based on size:
​ Micro
​ Small
 ​ Medium
​ Large

Module 2: Rules of Citizenship & Residence Status

1. Citizens of the Philippines
Under Section 1, Article IV of the 1987 Philippine Constitution, citizens are:
​ Those who are citizens of the Philippines at the time of the adoption of the 1987
Constitution.
​ Those whose fathers or mothers are citizens of the Philippines.
​ Those born before January 17, 1973, of Filipino mothers, who elect Philippine
citizenship upon reaching the age of majority.
​ Those who are naturalized in accordance with law.

2. Nonresident Citizen (NRC) Criteria (Sec. 22(E), NIRC)

A citizen is classified as an NRC if they meet any of the following:
​ Establishes to the satisfaction of the Commissioner of Internal Revenue the fact
of physical presence abroad with a definite intention to reside therein.
​ Leaves the Philippines during the taxable year to reside abroad either as an
immigrant or for employment on a permanent basis.
​ Leaves the Philippines for work and derives income from abroad, requiring
physical presence abroad most of the time during the taxable year.
​ Stays outside the Philippines for an aggregate period of 183 days or more by
the end of the taxable year.
Crucial Transition Rule: A nonresident citizen who arrives in the Philippines at any
time during the taxable year to reside permanently shall be considered a nonresident
citizen for that taxable year with respect to income derived from sources abroad until the
date of arrival. From arrival onwards, they are a Resident Citizen (RC).

3. Overseas Contract Workers (OCW) & Overseas Filipino Workers (OFW)

Under Revenue Regulation 1-2011, OFWs/OCWs are citizens employed in foreign
countries who are physically present there as a consequence of their employment.
​ Their salaries/wages must be paid by an employer abroad and not borne by
entities or persons in the Philippines.
​ They must be duly registered with the Philippine Overseas Employment
Administration (POEA) with a valid Overseas Employment Certificate (OEC).
​ Seafarers/Seamen: Filipino citizens receiving compensation for services
rendered abroad as a member of the complement of a vessel engaged
exclusively in international trade are classified as OFWs, provided they hold a
 valid Seafarer's Identification Record Book (SIRB) or Seaman's Book issued by
MARINA.
​ Tax Classification: For income taxation purposes, OCWs/OFWs are strictly
classified as Nonresident Citizens (NRC).

4. Resident Alien (RA) vs. Nonresident Alien (NRA)

​ Resident Alien (Sec. 22(F)): An alien whose residence is within the Philippines
but who is not a citizen. This includes individuals who are actually present in the
Philippines and are not mere transients or sojourners. An alien living in the
Philippines with no definite intention as to their stay is a resident. If they come for
a purpose requiring an extended stay, making a temporary home here, they are
classified as an RA.
​ Nonresident Alien Engaged in Trade or Business (NRA-ETB): An alien who
stays in the Philippines for an aggregate period of more than 180 days during
any calendar year, OR an individual who has business income in the Philippines.
This includes the performance of public office or personal services (excluding
services rendered as an employee).
​ Nonresident Alien Not Engaged in Trade or Business (NRA-NETB): An alien
who stays 180 days or less and does not derive business income. They are
subject to a flat 25% final income tax on their gross income from all sources
within the Philippines (interest, dividends, rents, salaries, wages, premiums,
annuities, compensation, remunerations, emoluments, casual gains, profits, etc.),
except for assets subject to Capital Gains Tax (CGT).

Module 3: Rules on Source of Income & Taxability

1. Tax Base and Situs Table

Taxpayer Classification Tax Base Source of Taxable

Income

Resident Citizen (RC) Net Income Within and Without

(Global Income)

Nonresident Citizen Net Income Within the Philippines

(NRC) Only
 Resident Alien (RA) Net Income Within the Philippines
Only

Nonresident Alien - ETB Net Income Within the Philippines

Only

Nonresident Alien - Gross Income Within the Philippines

NETB Only

2. General Flow of Taxability

​ Resident Citizens: Taxable on income derived from sources within and without
the Philippines.
​ All Other Classifications (NRC, RA, NRA-ETB, NRA-NETB): Taxable on
income derived from sources within the Philippines only.

Module 4: Types of Income & Tax Systems

Individual income is split into three categories depending on its nature:

1. Ordinary or Regular Income

Refers to income such as compensation income (salaries, wages), business income,
income from the practice of a profession, and gains from dealings in property not
subject to final taxes.
​ Tax System: Subject to the basic Graduated Tax Table under Section 24(A) of
the Tax Code.

2. Passive Income
Incomes derived from assets or investments from within the Philippines.
​ Tax System: Subject to Final Withholding Taxes (FWT) at specific rates (e.g.,
interest income, dividend income, royalties, prizes, and winnings). Passive
income earned from abroad by a Resident Citizen is lumped into ordinary income
and subject to basic graduated tax.

3. Capital Gains
Incomes derived from the sale of specific capital assets.
​ Tax System: Subject to Capital Gains Tax (CGT):
 ​ Sale of shares of stock of a domestic corporation not traded in the local
stock exchange (Sec. 24(C)).
​ Sale of real property located in the Philippines (Sec. 24(D)).

Module 5: Tax Tables & Brackets

1. Graduated Tax Rates (TRAIN Law - Effective Beginning Taxable Year 2023)

Taxable Income Bracket Income Tax Due

Not over ₱250,000 Exempt

Over ₱250,000 but not over ₱400,000 15% of excess over ₱250,000

Over ₱400,000 but not over ₱800,000 ₱22,500 + 20% of excess over
₱400,000

Over ₱800,000 but not over ₱102,500 + 25% of excess over

₱2,000,000 ₱800,000

Over ₱2,000,000 but not over ₱402,500 + 30% of excess over

₱8,000,000 ₱2,000,000

Over ₱8,000,000 ₱2,202,500 + 35% of excess over

₱8,000,000

Minimum Wage Earners (MWE): Statutorily exempt from basic income tax. Their
holiday pay, overtime pay, night shift differential pay, and hazard pay are likewise
exempt from income tax.

2. Historical Reference: Graduated Tax Rates (Taxable Years 2018 to 2022)

Taxable Income Bracket Income Tax Due

 Not over ₱250,000 Exempt

Over ₱250,000 but not over ₱400,000 20% of excess over ₱250,000

Over ₱400,000 but not over ₱800,000 ₱30,000 + 25% of excess over
₱400,000

Over ₱800,000 but not over ₱130,000 + 30% of excess over

₱2,000,000 ₱800,000

Over ₱2,000,000 but not over ₱490,000 + 32% of excess over

₱8,000,000 ₱2,000,000

Over ₱8,000,000 ₱2,410,000 + 35% of excess over

₱8,000,000

Module 6: Rules for Self-Employed & Professionals (SEP)

1. Definitions
​ Self-Employed: A sole proprietor or independent contractor reporting income
earned from self-employment. They control who they work for, how the work is
executed, and when it is done.
​ Professional: A person formally certified by a professional body (via studies or
practice) whose competence is measured against established standards. This
includes entertainers, athletes, directors, insurance agents, consultants,
bookkeepers, and individuals receiving talent fees.
​ Compensation Income: Earnings originating strictly from an
employer-employee relationship.

2. Tax Obligations for SEPs

Unlike compensation income earners (who pay only income tax), SEPs are generally
subject to two types of taxes:
​ Income Tax: Graduated rates OR the 8% preferential rate.
​ Business Tax: 12% Value-Added Tax (VAT) OR Percentage Tax under Section
116 (3%).
3. The 8% Preferential Tax Rate Scheme
Introduced under the TRAIN Law and preserved under EOPTA, qualified SEPs can opt
for an 8% tax rate on gross sales and other non-operating income.
​ In Lieu Of: This 8% tax is in lieu of both the basic graduated income tax rates
and the Section 116 percentage tax.
​ Purely Self-Employed Individual: The tax is computed as:
​ Income Tax Due=8%×(Gross Sales+Non-operating Income−P250,000)
​ Mixed Income Earner: An individual earning both compensation and
business/professional income.
​ The Compensation income is always taxed via the Graduated Tax Rates.
​ The Business income option can be taxed via the 8% rate if qualified.
​ Crucial Rule: For mixed income earners, the ₱250,000 deduction is
NOT allowed against business income because it has already been
applied against their compensation income.
​ Income Tax Due on Business=8%×(Gross Sales+Non-operating Income)

4. Requisites to Avail of the 8% Preferential Tax Rate

To qualify for the 8% rate, the SEP must satisfy all 5 conditions:
​ Gross sales and other non-operating income must not exceed the VAT threshold
of ₱3,000,000.
​ The SEP must be non-VAT registered.
​ Gross sales must not be derived from VAT-exempt sales and transactions.
​ The SEP must not be subject to Percentage Tax other than under Section 116 of
the Tax Code.
​ The SEP must signify their intention to elect the 8% income tax in their 1st
Quarter Return of the taxable year. This choice is irrevocable for that specific
taxable year.

Module 7: The Ease of Paying Taxes Act (EOPTA) Updates

1. Uniform VAT Threshold Basis
​ Prior to EOPTA: The ₱3,000,000 VAT threshold was measured using Gross
Sales for sellers of goods, and Gross Receipts for sellers of services.
​ Upon EOPTA Effectivity: The basis is unified. Both sellers of goods and sellers
of services use Gross Sales as the sole metric.

2. Definition of "Gross Sales" under EOPTA

Gross Sales refers to the total amount of money or its equivalent representing the
contract price, compensation, service fee, rental, or royalty, including materials supplied
with the services during the taxable period.
 ​ Exclusions: It excludes VAT and amounts earmarked for third parties or received
as reimbursements.
​ Long-term contracts: For contracts spanning more than one (1) year, the invoice
must be issued in the month the service, use, or lease of property is rendered or
supplied.

3. RA 11976 (EOPTA) Timeline

​ January 5, 2024: Signed into law by Pres. Ferdinand "Bongbong" Marcos Jr.
​ January 7, 2024: Published in the Official Gazette.
​ January 22, 2024: Effectivity of the law (15 days post-publication).
​ April 11, 2024: Publication of the Revenue Regulations (RR) implementing
EOPTA.
​ April 26, 2024: Effectivity of the IRRs (Mandatory compliance begins; 15 days
post-publication).

Module 8: Comprehensive Illustration Cases

Illustration 1: Mid-Year Status Change (Pedro - OFW)
Pedro, an OFW, returned to the Philippines for good in May 2025.
​ January to April 2025: Classified as a Nonresident Citizen (NRC). Only his
Philippine-sourced income is taxable.
​ May 2025 onwards: Classified as a Resident Citizen (RC). Taxable on global
income.
​ Note: Individual taxpayers are strictly required to use the calendar year period.

Illustration 2: Mid-Year Status Change (Ana - Permanent Migration)

Ana, a resident citizen, left the Philippines on July 1, 2025, to reside permanently in the
U.S. with her family.
​ January to June 2025: Classified as a Resident Citizen (RC).
​ July 2025 onwards: Classified as a Nonresident Citizen (NRC).

Illustration 3: Residency Determinations (Cases 1 to 5)

​ Case 1: Allan, natural-born citizen whose family migrated to the U.S. 15 years
ago, returned permanently on March 1, 2025.
​ Answer: Jan to Feb 2025 = NRC; March 1, 2025 onwards = RC.
​ Case 2: G.I. Joe, an American tech expert, was contracted from Jan to Mar
2025. Due to anticipated entries, he extended his stay indefinitely.
​ Answer: Resident Alien (RA). He has an extended stay and established a
temporary home.
 ​ Case 3: Michael Malone, an NBA coach on a month-long promotional tour,
intends to visit regularly.
​ Answer: Nonresident Alien Not Engaged in Trade or Business
(NRA-NETB).
​ Case 4: Assume Michael Malone (from Case 3) invested in stocks of domestic
corporations during his stay.
​ Answer: NRA-NETB. Passive dividend income is not considered income
derived from active trade or business.
​ Case 5: Nikola Jokic owns a restaurant operating in Malate, Manila.
​ Answer: Nonresident Alien Engaged in Trade or Business (NRA-ETB).
He is actively conducting a business inside the Philippines.

Illustration 4: Tax Base Determinations (Global vs. Local)

Baseline Data:
​ Gross Business Income (Philippines): ₱5,000,000 | Business Expenses
(Philippines): ₱3,000,000
​ Gross Business Income (Canada): ₱2,000,000 | Business Expenses (Canada):
₱1,000,000
​ Gross Business Income (Singapore): ₱1,000,000 | Business Expenses
(Singapore): ₱500,000
​ Case A: Taxpayer is a Resident Citizen (RC)
​ Formula: Global Gross Income − Global Expenses
​ Calculation: (5M+2M+1M)−(3M+1M+0.5M)=8,000,000−4,500,000
​ Taxable Net Income: ₱3,500,000
​ Case B: Taxpayer is a Nonresident Citizen (NRC)
​ Formula: Philippine Gross Income − Philippine Expenses
​ Calculation: 5,000,000−3,000,000
​ Taxable Net Income: ₱2,000,000
​ Case C: Taxpayer is a Resident Alien (RA)
​ Formula: Philippine Gross Income − Philippine Expenses
​ Calculation: 5,000,000−3,000,000
​ Taxable Net Income: ₱2,000,000
​ Case D: Taxpayer is a Nonresident Alien Engaged in Trade or Business
(NRA-ETB)
​ Formula: Philippine Gross Income − Philippine Expenses
​ Calculation: 5,000,000−3,000,000
​ Taxable Net Income: ₱2,000,000
​ Case E: Taxpayer is a Nonresident Alien Not Engaged in Trade or Business
(NRA-NETB)
​ Formula: Philippine Gross Income Only (No Deductions allowed)
 ​ Taxable Gross Income: ₱5,000,000 (Subject to a 25% flat final tax rate)

Case F: Dynamic Calculation (Filipino citizen leaves for Canada permanently in

July)
​ Jan to June (RC status): PH Gross: ₱5M, Canada Gross: ₱2M | PH
Deductions: ₱2M, Canada Deductions: ₱1M
​ July to Dec (NRC status): PH Gross: ₱2M, Canada Gross: ₱3M | PH
Deductions: ₱1M, Canada Deductions: ₱1.2M
​ Rule: Foreign income is only taxable during the RC period (Jan-June). Philippine
income is taxable for the entire year (Jan-Dec).
​ Gross Income:
​ Philippines (Full Year): ₱5,000,000+₱2,000,000=₱7,000,000
​ Canada (Jan-June Only): ₱2,000,000
​ Total Gross Income: ₱9,000,000
​ Allowable Deductions:
​ Philippines (Full Year): ₱2,000,000+₱1,000,000=₱3,000,000
​ Canada (Jan-June Only): ₱1,000,000
​ Total Deductions: ₱4,000,000
​ Taxable Income Calculation: ₱9,000,000−₱4,000,000= ₱5,000,000

Case G: Dynamic Calculation (NRC returns to the Philippines permanently in

July)
​ Jan to June (NRC status): Foreign income ignored. Only PH counts.
​ July to Dec (RC status): Foreign and PH income both count.
​ Gross Income:
​ Philippines (Full Year): ₱5,000,000+₱2,000,000=₱7,000,000
​ Canada (July-Dec Only): ₱3,000,000
​ Total Gross Income: ₱10,000,000
​ Allowable Deductions:
​ Philippines (Full Year): ₱2,000,000+₱1,000,000=₱3,000,000
​ Canada (July-Dec Only): ₱1,200,000
​ Total Deductions: ₱4,200,000
​ Taxable Income Calculation: ₱10,000,000−₱4,200,000= ₱5,800,000

Illustration 5: Purely Compensation Income Earners (Post-2023 Tax Tables)

​ Case 1: Net Taxable Compensation Income = ₱240,000
​ Calculation: Falls below the ₱250,000 threshold.
​ Income Tax Due: ₱0 (Exempt)
​ Case 2: Net Taxable Compensation Income = ₱300,000
​ Calculation: Fits bracket: 15% of excess over ₱250,000.
 ​ Step: 15%×(₱300,000−₱250,000)=15%×₱50,000
​ Income Tax Due: ₱7,500
​ Case 3: Net Taxable Compensation Income = ₱1,850,000
​ Calculation: Bracket: ₱102,500 + 25% of excess over ₱800,000.
​ Step 1: Excess amount =₱1,850,000−₱800,000=₱1,050,000
​ Step 2: Variable tax =25%×₱1,050,000=₱262,500
​ Step 3: Total =₱102,500+₱262,500
​ Income Tax Due: ₱365,000

Illustration 6: Purely Self-Employed and Professional (SEP) Options

CASE A: Purely SEP; Gross Sales ≤ ₱3,000,000 Threshold
Baseline Data:
​ Gross Sales: ₱2,800,000 | Cost of Sales: ₱1,500,000 | Operating Expenses:
₱750,000
​ Net Income: ₱550,000
​ Sub-Case 1: If Taxable Net Income is exactly ₱240,000
​ Income Tax Due: ₱0 (Exempt)
​ Sub-Case 2: Calculation using standard Graduated Tax Rates
​ Income Tax: Bracket: ₱22,500 + 20% of excess over ₱400,000.
​ Step 1: Variable component
=20%×(₱550,000−₱400,000)=20%×₱150,000=₱30,000
​ Step 2: Income Tax Due =₱22,500+₱30,000=₱52,500
​ Business Tax: Subject to 3% Percentage Tax (Sec. 116) because sales
are under ₱3M.
​ Business Tax Due: 3%×₱2,800,000=₱84,000
​ Total Combined Tax Exposure: ₱52,500+₱84,000= ₱136,500
​ Sub-Case 3: Calculation if the SEP opted for the 8% Preferential Tax Rate
​ Formula: 8%×(Gross Sales−₱250,000)
​ Calculation: 8%×(₱2,800,000−₱250,000)=8%×₱2,550,000
​ Income Tax Due: ₱204,000
​ Business Tax: ₱0 (Percentage tax is integrated and waived under the 8%
system).
Strategic Management Note: When choosing a system in the 1st quarter, the
graduated rate + percentage tax route yields a lower total exposure (₱136,500) than the
8% preferential option (₱204,000) in scenarios with high operating expenses.

CASE B: Purely SEP; Gross Sales Exceeds ₱3,000,000 Threshold

Baseline Data:
 ​ Gross Sales: ₱5,000,000 | Cost of Sales: ₱2,250,000 | Operating Expenses:
₱1,250,000
​ Net Taxable Income: ₱1,500,000
​ Restriction: The 8% preferential option is disqualified because gross sales
exceed the ₱3M threshold.
​ Income Tax Calculation (Graduated Table):
​ Bracket: ₱102,500 + 25% of excess over ₱800,000.
​ Variable component: 25%×(₱1,500,000−₱800,000)=25%×₱700,000=₱175,000
​ Income Tax Due: ₱102,500+₱175,000= ₱277,500
​ Business Tax Calculation:
​ Mandatorily subject to 12% Value-Added Tax (VAT).
​ VAT Due: 12%×₱5,000,000= ₱600,000

CASE C: Purely SEP; Gross Sales ≤ ₱3,000,000 but Voluntary VAT Registered
Baseline Data: Same financial metrics as Case A(2), but the taxpayer is voluntarily VAT
registered.
​ Restriction: Disqualified from electing the 8% rate due to explicit VAT registration
status.
​ Income Tax Due: Calculated via Graduated Rates = ₱52,500
​ Business Tax Due: Subject to 12% VAT instead of percentage tax.
​ VAT Calculation: 12%×₱2,800,000=₱336,000
​ Total Tax Due: ₱52,500+₱336,000= ₱388,500

This comprehensive guide organizes all concepts, definitions, formulas, rules, and case
illustrations presented across the textbook pages for Individual Taxpayers,
incorporating crucial legislative amendments under the Ease of Paying Taxes Act
(EOPTA) and the Capital Markets Efficiency Promotion Act (CMEPA - RA 12214).

1. Self-Employed & Professional (SEP) Tax Rules & Cases

Special Exclusions from the 8% Tax Rate
The 8% preferential income tax rate on gross sales/receipts is not applicable to:
​ VAT-registered taxpayers.
​ Taxpayers liable for Percentage Taxes other than Section 116 under Title V of the
NIRC (e.g., Common Carriers under Section 117).

Case D: Purely SEP Subject to Other Percentage Taxes

​ Scenario: Pedro is a taxi operator (subject to 3% Common Carrier's Tax under
Sec. 117). Gross sales: ₱2,800,000; Cost of direct services: ₱1,500,000;
Operating expenses: ₱750,000.
​ Core Question: Tax due if Pedro chooses the 8% tax rate?
​ Ruling: Pedro cannot avail of the 8% tax rate because common carriers are
subject to Section 117 percentage tax, not Section 116. He must be taxed under
the Graduated Rates.
​ Formula & Calculation:
​ Net Income=Gross Sales−Cost of Services−Operating Expenses
​ Net Income=₱2,800,000−₱1,500,000−₱750,000=₱550,000
​ Business Tax (3% CCT under Sec. 117):
​ ₱2,800,000×3%=₱84,000
​ Income Tax (Graduated Rates):
​ On first ₱400,000: ₱22,500
​ On excess (₱550,000−₱400,000=₱150,000) at 20%: ₱30,000
​ Total Income Tax: ₱22,500+₱30,000=₱52,500
​ Total Tax Due: ₱84,000+₱52,500=₱136,500

Case E: Purely SEP Exceeding the ₱3M VAT Threshold During the Year
​ Scenario: Pedro chooses the 8% rate in Q1. His gross sales are: Q1: ₱500,000;
Q2: ₱500,000; Q3: ₱2,000,000; Q4: ₱3,500,000. Total annual gross sales =
₱6,500,000. Total cost of sales: ₱3,000,000; Operating expenses: ₱1,440,000.
​ Core Question: Income tax payable at the end of the year?
​ Ruling (per RR 8-2018): Because cumulative gross sales (₱6.5M) exceeded the
₱3,000,000 VAT threshold, he is automatically disqualified from the 8% rate for
the entire year and must use Graduated Rates. He receives a tax credit for the
8% taxes paid from Q1 to Q3.
​ Formula & Calculation:
​ Net Taxable
Income=₱6,500,000−₱3,000,000−₱1,440,000=₱2,000,000+₱60,000=₱2,060,000
​ Graduated Income Tax Due:
​ On first ₱2,000,000: ₱402,500
​ On excess (₱60,000×30%): ₱18,000
​ Total Annual Income Tax Due: ₱420,500
 ​ Less: Quarterly Tax Paid under 8% (Q1 to Q3 total sales = ₱3,000,000):
​ Quarterly Payments=(₱3,000,000−₱250,000 standard deduction)×8%=₱220,000
​ Annual Income Tax Payable: ₱420,500−₱220,000=₱200,500
Compliance Note (RR 8-2018):

●​ Taxpayer must update registration from non-VAT to VAT within 30 days from the
close of the month the threshold was breached.
●​ Section 116 Percentage Tax (3%) applies from the beginning of the taxable year
up to the month immediately before the VAT threshold was breached.

2. Mixed Income Earners

Definition
An individual who earns income from both compensation (employer-employee
relationship) and business/professional practice simultaneously.

Tax Treatment Summary

Business Gross Sales Tax Options & Obligations

Compensation Income: Always subject

≤ ₱3,000,000
to Graduated Rates.

Business Income Options:

1. Opt for 8% Tax: Computed on Gross

Sales/Receipts without the ₱250,000
standard deduction (as it is already
applied to compensation). Exempt from
Sec. 116 Percentage Tax.

2. Opt for Graduated Rates: Add Net

Business Income to Compensation
Income; evaluate total under Graduated
 table. Subject to Sec. 116 Percentage
Tax.

Compensation Income: Subject to

> ₱3,000,000
Graduated Rates.

Business Income: Subject to 12% VAT

+ Graduated Rates (Combined Net
Income).

Section 116 Percentage Tax Rates Over Time

​ Prior to July 1, 2020: 3% of AGSR (Annual Gross Sales/Receipts)
​ July 1, 2020 to June 30, 2023: 1% of AGSR
​ Beginning July 1, 2023 onwards (EOPTA): 3% of AGSR

Illustration 7: Mixed Income Earner Calculations

Case A: Gross Sales Not Exceeding ₱3,000,000 (Taxable Year 2025)
​ Data: Compensation Income: ₱900,000; Gross Sales: ₱2,800,000; Cost of
Sales: ₱1,500,000; Operating Expenses: ₱750,000.
​ Option 1: Using Graduated Rates for Both
​ Net Business Income=₱2,800,000−₱1,500,000−₱750,000=₱550,000
​ Total Taxable Income=₱900,000 (Compensation)+₱550,000 (Business)=₱1,450,000
​ Tax on first ₱800,000: ₱102,500
​ Tax on excess (₱650,000×25%): ₱162,500
​ Total Income Tax Due: ₱102,500+₱162,500=₱265,000
​ Option 2: Availing of the 8% Preferential Tax Rate on Business
​ On Compensation (Graduated Rates):
​ Total Taxable Income: ₱900,000
​ Tax on first ₱800,000: ₱102,500
​ Tax on excess (₱100,000×25%): ₱25,000
​ Compensation Tax Due: ₱127,500
​ On Business Income (8% Flat Rate):
​ Business Tax Due=₱2,800,000×8%=₱224,000(No ₱250k deduction allowed)
​ Total Income Tax Due: ₱127,500+₱224,000=₱351,500

Case B: Gross Sales Exceeding ₱3,000,000 (Taxable Year 2025)

 ​ Data: Compensation: ₱900,000; Gross Sales: ₱5,000,000; Cost of Sales:
₱2,250,000; Operating Expenses: ₱1,250,000.
​ Ruling: Must use Graduated Rates and is subject to 12% VAT on business
transactions.
​ Calculation:
​ Net Business Income=₱5,000,000−₱2,250,000−₱1,250,000=₱1,500,000
​ Total Taxable Income=₱900,000+₱1,500,000=₱2,400,000
​ Tax on first ₱2,000,000: ₱402,500
​ Tax on excess (₱400,000×30%): ₱120,000
​ Total Income Tax Due: ₱402,500+₱120,000=₱522,500

3. Passive Income Subject to Final Withholding Tax (FWT)

Definition
A system where taxes are withheld at source by the withholding agent. This withholding
is a full and final payment of the tax due; the recipient does not need to include this
income in their annual Income Tax Return (ITR).
Passive income earned abroad by Resident Citizens is subject to regular
basic/graduated income tax, not FWT.

The Five (5) Types of Passive Income

​ Interest Income
​ Dividend Income
​ Royalties
​ Prizes
​ Other Winnings

FWT Rate Matrix (Amended by CMEPA - Effective July 1, 2025)

Passive Income Citizens & NRA-ETB NRA-NETB

Classification Residents

Standard Interest 20% 20% 25%

(Local currency
bank deposits,
trust funds)
FCDS / FCDU 15% Exempt Exempt
Interest (Prior to
CMEPA)

FCDS / FCDU 20% 20% 25%

Interest (Under
CMEPA)

Long-Term Exempt Exempt 25%

Deposit/Investm
ent (Prior to
CMEPA)

Long-Term 20% 20% 25%

Deposit/Investm
ent (Under
CMEPA)

Royalties: 20% 20% 25%

General (Patents,
etc.)

Royalties: Books, 10% 10% 25%

Literary Works,
Musical
Compositions
Prizes: Exceeding 20% 20% 25%
₱10,000

Prizes: ₱10,000 Graduated Rates Graduated Rates 25%

or less

PCSO / Lotto 20% 20% 25%

Winnings:
Exceeding
₱10,000

PCSO / Lotto Exempt Exempt 25%

Winnings:
₱10,000 or less

Other Winnings: 20% 20% 25%

Any amount

Cash/Property 10% 20% 25%

Dividends (From
Domestic Corp)

Cash/Property Exempt (Under 20% 25%

Dividends (From CMEPA)
ROHQ)
 Partnership 10% 20% 25%
Distributable Net
Income (Except
GPP)

Joint Venture / 10% 20% 25%

Association Net
Income (Taxable
as Corp)

Short Illustrations
​ Illustration 8-A: Ana earns ₱10,000 interest from a bank deposit in Manila.
​ FWT Due=₱10,000×20%=₱2,000
​ Net amount credited: ₱10,000−₱2,000=₱8,000
​ Included in ITR? No.
​ Illustration 8-B: Pedro earns a ₱100,000 cash dividend from a domestic
corporation.
​ FWT Due=₱100,000×10%=₱10,000
​ Net cash received: ₱100,000−₱10,000=₱90,000

Illustration 8-C: Comprehensive Passive vs. Basic Income Case

A Resident Citizen provided the following data. Income items are classified below as
either Basic Taxable Income (ITR) or Final Taxed Income (FWT) under CMEPA rules:

1. Basic Income Taxable Items (Graduated Rates Table)

​ Gross Business Income (Philippines): ₱2,000,000
​ Gross Business Income (Canada): ₱3,000,000
​ Interest Income (BDO Canada): ₱50,000 (Foreign source)
​ Dividend Income (Resident Foreign Corp): ₱75,000 (Foreign source)
​ Dividend Income (Non-Resident Foreign Corp): ₱102,000 (Foreign source)
​ Singapore Sweepstakes Winnings: ₱200,000 (Foreign source)
​ Prizes (Robinsons Manila): ₱8,000 (Local source, ≤ ₱10,000)
​ Prizes (SM Shanghai, China): ₱30,000 (Foreign source)
​ Less Business Expenses: Philippines (₱1,400,000) and Canada (₱2,050,000)
 Total Taxable Income (ITR)=₱5,000,000 Gross−₱3,450,000 Expenses+₱465,000 Misc
Income=₱2,015,000

2. Final Taxed Passive Items (FWT Calculations under CMEPA)

​ Interest Income (BDO Philippines): ₱100,000×20%=₱20,000
​ Dividend Income (Domestic Corp): ₱125,000×10%=₱12,500
​ Interest Income (FCDU Philippines): ₱50,000×20%=₱10,000(Uniform rate under
CMEPA)
​ PCSO Winnings (₱500,000): ₱500,000×20%=₱100,000
​ Other Winnings (Philippines): ₱50,000×20%=₱10,000
​ Prizes (SM Manila): ₱20,000×20%=₱4,000(Exceeds ₱10,000)
​ Note: Philippine Lotto Winnings of ₱10,000 are Exempt.

Total Final Tax on Passive Income=₱156,500

Definition: Deposit Substitutes

Section 22(Y) of the Tax Code (as amended by CMEPA): An alternative form of
obtaining funds from the public (the term "public" means twenty (20) or more
individual or corporate lenders at any given time) through the issuance,
endorsement, or acceptance of debt instruments for the borrower's own account, for the
purpose of relending or purchasing receivables.
Interbank call loans with a maturity not exceeding five (5) days to cover reserve
deficiencies are explicitly excluded.

4. Interest Income from Long-Term Deposits/Investments

Definitions & Pre-CMEPA Rules
Refers to a certificate of time deposit or investment (savings, trust funds, deposit
substitutes) with a maturity period of not less than five (5) years, issued by banks to
individuals in denominations of ₱10,000 or as prescribed by the BSP.
​ Prior to CMEPA: Entirely exempt if held to maturity. If pre-terminated before the
5th year, it faced holding-period graduated FWT rates:
​ 4 years to less than 5 years: 5%
​ 3 years to less than 4 years: 12%
​ Less than 3 years: 20%

Post-CMEPA Uniform Rule

Crucial Rule Change: Upon the effectivity of the CMEPA, long-term exemptions and
pre-termination brackets are repealed. All individual interest income from long-term
deposits or investments is taxed at a uniform flat rate of 20% FWT (25% for
NRA-NETBs).

Historical Pre-Termination Cases (Pre-CMEPA Context)

​ Case A: Juan (Resident Citizen) holds a 10-year instrument for 2 years, then
transfers it to Smith (Resident Alien), who holds it for 8 years until maturity.
​ Juan: Pays 20% FWT (held < 3 years).
​ Smith: Exempt (held ≥ 5 years).
​ Case B: Juan holds a 10-year instrument for 3 years → transfers to Smith for 2
years → transfers to Pedro who holds it for 5 years until maturity.
​ Juan: Pays 12% FWT (held 3 to < 4 years).
​ Smith: Pays 20% FWT (held < 3 years).
​ Pedro: Exempt (held exactly 5 years).
​ Case C: Smith (NRA-ETB) holds it for 3 years → Juan holds it for 2 years →
James (NRA-ETB) pre-terminates it after 4 years.
​ Smith: Pays 12% FWT.
​ Juan: Pays 20% FWT.
​ James: Pays 5% FWT (held 4 to < 5 years).
​ Case D: Mr. X invests money via a Bank Trust Department into a 5-year
corporate bond.
​ Ruling: Not Exempt. Even if held for 5 years, a corporate bond is not
issued by a bank, failing Section 22(FF) rules.
​ Case E: Bank Trust Department invests in a 10-year bank deposit certificate, but
registers it under the name of the Trust Department, not the individual client.
​ Ruling: Not Exempt. The investment must be registered explicitly in the
name of the qualified individual investor.
​ Case F: Bank Trust Department invests funds in a 10-year bank deposit
certificate explicitly in the name of Mr. X.
​ Ruling: Exempt (under historical pre-CMEPA rules).

5. Capital Gains Tax (CGT) & Stock Transaction Tax (STT)

Asset Classifications (Section 39)
​ Ordinary Assets:
​ Stock in trade or property included in inventory.
​ Property used in trade or business subject to depreciation.
​ Real property held primarily for sale to customers in the ordinary course of
business.
 ​ Real property used in the taxpayer's trade or business.
​ Capital Assets: Any property held by the taxpayer that does not fit the
description of an ordinary asset (e.g., personal vehicles, personal jewelry,
land/buildings not used in business).

1. Capital Gains on Shares of Stock (Not Traded)

Requisites for CGT Liability
​ The asset sold must be shares of stock of a corporation.
​ The shares must not be listed and traded through the local stock exchange.
​ The seller must not be a dealer in securities.
​ The transaction must yield a net capital gain.

Historical vs. Present Rules

​ Prior to CMEPA: Applied only to shares of a domestic corporation at a flat rate
of 15%. Shares of foreign corporations were subject to basic income tax.
​ Under CMEPA: The 15% CGT is expanded to apply to shares of both domestic
and foreign corporations, provided they are not listed or traded in the local
stock exchange.

Formulas

Capital Gain=Gross Selling Price−Historical Cost

Capital Gains Tax (CGT) Due=Capital Gain×15%

2. Percentage Tax on Shares of Stock (Traded via Local Exchange)

Known as the Stock Transaction Tax (STT) under Section 127, it is calculated directly
on the gross selling price:
​ Prior to CMEPA: 6/10 of 1%(0.6%) of the gross selling price.
​ Under CMEPA: 1/10 of 1%(0.01%) of the gross selling price.

3. Capital Gains on Real Property Located in the Philippines

Subject to a 6% CGT under Section 24(D)(1).

Requisites
​ The property must be real property (land and/or buildings) classified as a capital
asset.
​ It must be physically located within the Philippines.
Tax Base & Formulas

Tax Base=Highest of: (1) Gross Selling Price, (2) Zonal Value, or (3) Assessed Fair Market
Value

CGT Due=Tax Base×6%

Special Rules:

●​ Sale of Real Property to the Government: The individual taxpayer has the
flexible option to be taxed either at the 6% CGT flat rate or under Basic Income
Tax (Graduated Rates).
●​ Other Capital Assets: Gains from the sale of capital assets not covered by
specific CGT or STT laws (e.g., personal-use vehicles, personal jewelry) are
always subject to Basic Income Tax using graduated rates.

Summary of Capital Gains Tax Transactions

SALE OF SHARES OF STOCK

-----------------------------------------------------

| |

TRADED in Stock Exchange NOT TRADED in Stock Exchange

| |

------------------------ ---------------------------------

| | | |

Domestic Corp Foreign Corp Domestic Corp Foreign Corp

| | | |

------------ ---------- ------------------ -----------------

| | |

Exempt from Income Tax Subject to 15% CGT • Prior to CMEPA:

 Here is the comprehensive, highly organized summary and transcription of all
concepts, definitions, formulas, rules, and case illustrations presented across the
textbook pages.

I. Capital Gains Tax (CGT) Transactions

Summary of Capital Gains Tax Transactions (Under CMEPA)
The tax treatment of capital asset dispositions varies by asset type and location:

Asset Type Sub-Category / Condition Tax Treatment

Shares of Stock Traded in the Local Stock Exempt from Income

Exchange (LSE) Tax (Subject to Stock
Transaction Percentage
Tax under Sec. 127)

Not Traded in the LSE Subject to 15% Capital

(Domestic Corporation) Gains Tax (CGT)

Not Traded in the LSE Subject to 15% Capital

(Foreign Corporation) Gains Tax (CGT) under
CMEPA rules

Real Property Classified as Capital Subject to 6% Capital

Asset (Located in the Gains Tax (CGT) based
Philippines) on Gross Selling Price or
Fair Market Value,
whichever is higher

Classified as Capital Subject to Basic Tax

Asset (Located Abroad) (Graduated Rates)
 Classified as Ordinary Subject to Basic Tax
Asset (Any Location) (Graduated Rates)

Illustration 10: CGT on Sale of Shares of Stock

Case 1: Sale through the Local Stock Exchange
​ Transaction: George sold 2,000 shares of a domestic corporation in the local
stock exchange at P110 per share. The shares were purchased 3 years ago at
P100 per share.
​ Answer: P0 CGT. The transaction is subject to a stock transaction tax (1/10 of
1% or current rate as stated in text), not CGT.

Case 2: Direct Sale of Domestic Shares at a Gain

​ Transaction: George sold 2,000 shares of a domestic corporation directly to a
buyer (Clifford) at P180 per share. The shares were acquired 6 months ago at
P105 per share.
​ Solution:
​ Selling Price (2,000 sh.×P180)=P360,000
​ Less: Cost (2,000 sh.×P105)=(P210,000)
​ Capital Gain=P150,000
​ CGT Rate (TRAIN Law)=15%
​ Capital Gains Tax Due=P22,500

Case 3: Direct Sale of Domestic Shares at a Loss

​ Transaction: George sold 2,000 shares of a domestic corporation directly to a
buyer (Earl) at P100 per share. The shares were acquired 2 years ago at P105
per share.
​ Answer: P0 CGT. The transaction resulted in a loss.

Case 4: Direct Sale of Foreign Shares (Pre vs. Post CMEPA)

​ Transaction: George sold 2,000 shares of a foreign corporation directly to a
buyer (Clifford) at P180 per share. The shares were acquired 6 months ago at
P105 per share.
​ a) Prior to CMEPA Effectivity: P0 CGT. CGT on stock sales historically
applied only to domestic corporations. Gains on foreign corporation stock
sales were subject to basic graduated income tax rates.
​ b) During CMEPA Effectivity: P22,500. Under CMEPA, the 15% CGT
applies to capital gains from the sale of shares in both domestic and
 foreign corporations, provided they are not traded through the local stock
exchange.

Illustration 11: CGT on Sale of Real Properties

Case A: Ordinary Asset vs. Capital Asset
Pedro disposed of two properties:
​ Parcel of land used in his trading business: Selling Price = P3,000,000; Cost =
P1,500,000.
​ Residential lot: Selling Price = P5,000,000; Fair Market Value (FMV) =
P6,000,000; Cost = P4,000,000.
​ Question 1: Total CGT due?
​ Answer: P360,000. Only the residential lot (capital asset) is subject to
CGT (P6,000,000 higher tax base×6%). The parcel of land used in business
is an ordinary asset; its P1,500,000 gain is included in gross income
subject to basic graduated rates.
​ Question 2: If the residential lot was sold at P3,000,000 instead, what is the
correct CGT?
​ Answer: P360,000. Real property CGT is strictly 6% of the higher value
between the selling price and the FMV/zonal value. It is independent of
actual gain or loss.

Case B: Real Properties Located Abroad

​ Transaction: Leomar sold a parcel of land held as a capital asset in Canada for
P3,000,000 (Cost = P1,500,000).
​ Answer: P0 CGT. The 6% CGT applies only to capital asset real properties
located within the Philippines. Gains from foreign property sales are subject to
basic income tax.

Case C: Real Properties Sold to the Government or a GOCC

​ Transaction: Pedro sold his residential lot (FMV P6,000,000) to the Quezon City
government for P3,000,000.
​ Answer: Either P360,000 CGT or Basic Graduated Income Tax on the income
derived, at the option of the taxpayer (Sec. 24(D)(1)).

Case D: Comprehensive Capital Gains Mixing Assets

Pedro (resident citizen) realized the following transactions:
​ Sale of domestic shares directly to a buyer: Gain = P110,000
​ Sale of domestic shares through the LSE: Gain = P25,000
 ​ Sale of PH real property (capital asset): Selling Price = P2,000,000; FMV =
P3,000,000
​ Sale of real property abroad: Gain = P300,000
​ Question: Total Capital Gains Tax?
​ Solution:
​ Shares directly sold: P110,000×15%=P16,500
​ PH Real Property: P3,000,000 (Higher Base)×6%=P180,000
​ Total CGT Due=P16,500+P180,000=P196,500
​ (Note: LSE sale is subject to percentage tax; foreign property gain goes to
basic tax).

II. Sale of Principal Residence

Concept & Requisites for Tax Exemption
A "Principal Residence" is the family home of the taxpayer (dwelling house and the land
it sits on) where they permanently reside or intend to return to if temporarily absent
(certified by Barangay Chairman or Building Administrator).
To fully exempt the 6% CGT on its sale, the following conditions must be met:
​ Proceeds are fully utilized to acquire or construct a new principal residence
within 18 calendar months from the date of sale.
​ The historical cost/adjusted basis of the old property carries over to the new one.
​ The BIR is notified within 30 days from the sale date via a prescribed tax return.
​ The exemption can only be availed of once every 10 years.
​ The 6% CGT amount must be deposited in an interest-bearing bank Escrow
Agreement with the BIR, to be released only upon verification of full utilization.
Formula for Partial Utilization
If the selling proceeds are not fully utilized, the unutilized portion is taxed using this
formula:

Taxable Amount=

Gross Selling Price

Unutilized Portion

×(Gross Selling Price or FMV, whichever is higher)

CGT Due=Taxable Amount×6%

Illustration 12 & 13: Principal Residence Case Studies

Base Data: Pedro sold his principal residence for P4,000,000 (FMV = P6,000,000;
Zonal Value = P5,000,000; Expenses = P125,000). The higher valuation base is
P6,000,000.
​ Question 1: If Pedro buys a new principal residence for P4,000,000, how
much is the CGT?
​ Answer: P0. Full proceeds (P4,000,000) were utilized.
​ Question 2: If Pedro buys a new principal residence for P6,000,000, how
much is the CGT?
​ Answer: P0. Full proceeds were utilized.
​ Question 3: If Pedro buys a new principal residence for P2,000,000, how
much is the CGT?
​ Solution:
​ Unutilized Portion=P4,000,000−P2,000,000=P2,000,000
​ Taxable Amount=
​ P4,000,000
​ P2,000,000
​ ​
​ ×P6,000,000=P3,000,000
​ CGT Due=P3,000,000×6%=P180,000
III. Taxable Income Frameworks (Subject to Basic Tax)
A. Pure Compensation Income Earner
​ Rule: Under the TRAIN Law (RA 10963), no deductions are permitted for pure
compensation income earners.
​ Pro-Forma Structure:
​ Gross Compensation Income=Pxxx
​ Taxable Income=Pxxx
​ Income Tax Due (via Graduated Rates)=Pxxx
​ Less: Creditable Withholding Tax on Compensation=(Pxxx)
​ Income Tax Payable=Pxxx

B. Pure Business Income Earner

​ Pro-Forma Structure:
​ Gross Sales / Gross Receipts (under EOPTA)=Pxxx
​ Less: Cost of Sales / Cost of Direct Services=(Pxxx)
​ Gross Business / Professional Income=Pxxx
​ Less: Allowable Operating/Business Expenses=(Pxxx)
​ Taxable Net Income=Pxxx
​ Income Tax Due (Graduated Rates or 8% Option if qualified)=Pxxx
​ Less Tax Credits/Payments:
​ - Prior Year’s Excess Credits=(Pxxx)
​ - Tax Payments for Previous Quarters=(Pxxx)
​ - Creditable Withholding Taxes (CWT)=(Pxxx)
​ - Foreign Income Tax Credit=(Pxxx)
​ Income Tax Payable=Pxxx

C. Mixed Income Earner

Applies to individuals earning both compensation and business/professional income.
Taxable compensation income is added to taxable net business income to calculate
total taxable income subject to graduated rates (or the business income may opt for the
8% flat rate under specific qualifications).

Income Tax Compliance for Married Taxpayers

​ Separate Computation: Husband and wife must compute their individual
income taxes separately based on their respective incomes (Sec. 24(A)(2)).
 ​ Unidentifiable Income Rule: If an income cannot be definitely attributed to
either spouse, it must be divided equally (50/50) between them.
​ Joint Filing Transition (EOPTA Updates):
​ Prior to EOPTA: Married individuals who do not earn income purely from
compensation were required to file a consolidated return covering both
spouses, or file separately for the Bureau to later consolidate.
​ Under EOPTA Sec. 51(D): Spouses who are both self-employed
(engaged in business/profession) shall file a joint return. If separate
filing is practically necessary (e.g., registered under different RDOs), they
may file separately without forced Bureau consolidation.

IV. Creditable Withholding Taxes (CWT) vs. Final Withholding Taxes (FWT)
​ Final Withholding Tax (FWT): Full settlement of tax liability at the source.
Income subjected to FWT is not included in the regular return (e.g., 10% on
domestic dividends, 20% on local bank deposit interest).
​ Creditable Withholding Tax (CWT): An advance collection of income tax. The
payee uses the withheld amount as a tax credit to deduct from their total
quarterly or annual tax due. Statements are issued via BIR Form 2307 (CWT)
and BIR Form 2306 (Final Tax) within 20 days of the close of the quarter.

Summary of CWT Rates (RR 11-2018 & RR 5-2025 Updates)

Category Payee Criteria / CWT %

Threshold

Professional Fees Individual ≤ P3M annual 5%

gross income

Individual > P3M annual 10%

gross income

Non-Individual ≤ P720k 10%

annual gross income
 Non-Individual > P720k 15%
annual gross income

Rentals / Goods / Real or Personal 5%

Services Property Rentals

General Goods 1%

General Services 2%

Partners of GPPs Individual Partner ≤ 10%

P720k annual income

Individual Partner > 15%

P720k annual income

Joint Ventures (JV) Payment to local supplier 1%

of Goods (RR 14-2023)

(Under RR 14-2023) Payment to local supplier 2%

of Services (RR 14-2023)

Distributive share to 15%

co-venturer from
non-taxable JV
 Credit Cards / Platforms Gross amount paid by 1/2%
credit card companies to
merchants

(Under RR 5-2025) Gross marketplace/digital 1/2%

platform operator
remittances to sellers

Illustration 13: Case Studies on Withholding Taxes

Case A: Commercial Lease
​ Transaction: Pepito Manalo leased commercial property to Elsa Enterprises for
P50,000/month.
​ Question 1: Rent expense recognized by Elsa? P50,000 (Gross amount).
​ Question 2: Cash received by Pepito? P47,500 (P50,000 rent−5% CWT).
​ Question 3: Nature of the tax? Creditable Withholding Tax (CWT).

Case B: Pure Compensation Computation

​ Data: Employee Gross Income = P450,000. Deductions: SSS (P6,000),
PhilHealth (P8,400), Pag-ibig (P2,400), Union Dues (P1,200). Tax withheld by
employer = P28,000.
​ Solution:
​ Gross Compensation=P450,000
​ Less: Mandatory Nontaxable Contributions (SSS+PH+PI+Union)=(P18,000)
​ Taxable Income=P432,000
​ Tax Due: On 1st P400,000=P22,500
​ On excess: (P32,000×20%)=P6,400
​ Total Tax Due=P28,900
​ Less: Tax Withheld by Employer=(P28,000)
​ Income Tax Payable=P1,900

Case C: Mixed Income (Global Scope)

​ Data: Compensation = P1,000,000. PH Gross Business Income = P2,000,000
(Expenses = P1,400,000). Canada Gross Business Income = P3,000,000
(Expenses = P2,050,000). Tax credits: Employer CWT = P150,000; Business
CWT = P100,000; Q1–Q3 payments = P125,000.
 ​ Solution:
​ Taxable Compensation Income=P1,000,000
​ Net Income, PH Business (P2,000,000−P1,400,000)=P600,000
​ Net Income, Canada Business (P3,000,000−P2,050,000)=P950,000
​ Total Taxable Income=P2,550,000
​ Tax Due on 1st P2,000,000=P402,500
​ Tax Due on excess (P550,000×30%)=P165,000
​ Total Tax Due=P567,500
​ Less Credits: (P150,000 employer CWT+P100,000 business CWT+P125,000 quarterly
paid)=(P375,000)
​ Income Tax Payable=P192,500

V. Quarterly Tax Returns & Comprehensive Cases

Due Dates for Individual Income Tax Returns
​ 1st Quarter Return: May 15
​ 2nd Quarter Return: August 15 (45 days after the close of the quarter)
​ 3rd Quarter Return: November 15 (45 days after the close of the quarter)
​ Annual/Final Adjusted Return: April 15 of the succeeding year

Illustration 14: Cumulative Quarterly Income Tax Due

The table tracks the cumulative accounting system used for individual business tax
tracking:

Item 1st Quarter 2nd Quarter 3rd Quarter Q4 / Annual

Gross Sales P1,200,000 P2,100,000 P3,000,000 P3,700,000

Cost of (700,000) (1,200,000) (1,800,000) (2,200,000)

Sales

Business (200,000) (325,000) (550,000) (600,000)

Expenses
 Taxable P300,000 P575,000 P650,000 P900,000
Income

Income Tax P7,500 P57,500 P72,500 P127,500

Due

Less: Prior - (7,500) (57,500) (72,500)

Quarter Paid

Income Tax P7,500 P50,000 P15,000 P55,000

Payable

Illustration 15: Spouses Kristof & Ana Comprehensive Tax Computation

Background Profile Information:
​ Kristof: Gross professional income = P800,000; Professional expenses =
P425,000.
​ Ana: Gross compensation income = P400,000.
​ Shared/Unattributable Joint Items: Interest on notes receivable = P4,000;
Miscellaneous income = P60,000; Miscellaneous expenses = P20,000. (These
items must be split 50/50).
​ Isolated/Passive Asset Sales:
​ Ana: Dividend from resident corp = P10,000. Interest on PH bank deposit
= P3,000.
​ Kristof: Dividend from domestic corp = P5,000. Interest on PH bank
deposit = P2,000. Royalty income = P2,000. Capital gain on direct share
sale (ABC Co.) = P80,000. Capital loss on direct share sale (DEF Co.) =
(P20,000).
​ Joint Property: Capital gain on land sale in Quezon City = P2,000,000
(Selling Price = P10,000,000; Cost = P8,000,000; FMV = P12,000,000).
Final Computed Answers:
​ Total Capital Gains Taxes Paid by Spouses: P732,000
​ Shares (Kristof): (P80,000 gain−P20,000 loss)×15%=P12,000.
​ Land (Joint): P12,000,000 higher FMV×6%=P720,000.
​ Total Final Taxes Paid on Passive Income by Spouses: P3,600
​ Domestic Dividend (Kristof): P5,000×10%=P500.
​ Resident Dividend (Ana): Subject to basic tax, not final tax (P0).
​ Bank Deposit Interest (Combined): (P2,000+P3,000+P6,000 bank interest
from Illus. 14 if combined)×20%=P2,200.
​ Royalty (Kristof): P2,000×20%=P400.
​ Domestic Dividend from page 112 summary: P10,000 total×10%=P1,000.
​ Taxable Income of Kristof: P403,000
​ Professional Net (P800,000−P425,000)=P375,000.
​ Shared Notes Interest (50% of P4,000)=P2,000.
​ Shared Net Misc Income (50% of [P60,000−P20,000])=P20,000+P6,000 shared
resident dividend from table=P26,000.
​ Taxable Income of Ana: P438,000
​ Compensation Income=P400,000.
​ Shared Notes Interest=P2,000.
​ Shared Net Misc Income=P26,000+P10,000 individual misc income=P36,000.

VI. Special Categories of Individual Taxpayers

1. Minimum Wage Earners (MWE)
​ Definition: Workers in the private or public sector paid the statutory minimum
wage set by regional boards (RTWPB).
​ Absolute Exemptions: MWEs pay P0 income tax on their basic minimum
wage, as well as their:
​ Holiday Pay
​ Overtime Pay
​ Night Shift Differential
​ Hazard Pay

Core Rules & Jurisprudence (Soriano vs. Secretary of Finance):

​ The P90,000 Bonus Limit: 13th-month pay and other structural benefits are
tax-free up to P90,000. If an MWE's bonuses exceed P90,000, only the excess is
subject to regular tax.
​ The Supreme Court ruled that earning taxable bonuses or minor structural
adjustments does not forfeit the MWE's core tax exemption on their basic wage
and statutory allowances.
 ​ Business Income Exception: If an MWE earns outside income from trade,
business, or freelance professional practice, their entire income (business +
wage) becomes subject to regular taxation.

Summary Matrix of Applicable Taxes for MWEs

Taxpayer Status Income Tax Status Withholding Status

1. Purely MWE Fully Exempt Fully Exempt

2. MWE with non-wage Wage/Allowances Wage/Allowances

benefits > P90k Exempt; Excess bonus Exempt; Excess bonus
taxed withheld

3. MWE with additional Minimum wage remains Business transactions are

business income exempt; Business subject to standard CWT
income is subject to
basic tax

Legal Definition of Hazard Pay Workspaces:

Workplaces involving extreme environmental elements, chemical contaminants, ionizing
radiation, explosives, dangerous power tools, fire-fighting, logging, deep-sea fishing,
mining, quarrying, or direct exposure to biological pathogens (bacteria/viruses).

2. Senior Citizens (SCs), Persons with Disabilities (PWDs), & Solo Parents (SP)
​ General Rule: They are treated the same as ordinary individual taxpayers and
must file an ITR and pay basic taxes if they earn regular taxable income.
​ Exemption Thresholds:
​ If their compensation income falls within MWE rules, they are fully exempt
under MWE provisions.
 ​ Under RR 10-2008, if their total gross annual income does not exceed
P250,000, they are fully exempt from income tax and are not required to
file an ITR.
​ Retained Passive Liabilities: Even if exempt from basic income tax, they are
still liable for:
​ 20% Final Withholding Tax on passive interest earned from local bank
deposits.
​ 10% Final Withholding Tax on:
​ Cash or property dividends received from domestic corporations,
insurance, or mutual funds.
​ Distributive shares in the net income of partnerships (excluding
General Professional Partnerships).
​ Shares in the net income of joint ventures, associations, or
consortia taxable as corporations (Sec. 24(B)(2)).

• Pre-CMEPA: 0.6% • Under CMEPA:

• Under CMEPA: 0.01% 15% CGT

This is a comprehensive, structured reference guide compiling every concept,
definition, formula, case, and statutory provision across the uploaded pages of
Chapter 2: Individual Taxpayers, fully incorporating the Ease of Paying Taxes Act
(EOPTA - RA 11976) updates and relevant Revenue Regulations (RR 4-2024).

I. Taxpayer Classifications & Groupings (Under RA 11976 / EOPTA)

1. Classification Thresholds
Taxpayers are classified into four distinct categories based on their annual gross sales:

Group Gross Sales Threshold

Micro Less than P3,000,000

Small P3,000,000 to less than P20,000,000

Medium P20,000,000 to less than

P1,000,000,000 (P1B)

Large P1,000,000,000 (P1B) and above

2. Statutory Definition of "Gross Sales" under EOPTA
For the purpose of these groupings, Gross Sales refers exclusively to:
​ Total sales revenue, net of value-added tax (VAT), if applicable, during the
taxable year, without any other deductions.
​ Business income, which includes income from the conduct of trade or business
or the exercise of a profession.
​ Exclusions: It explicitly excludes compensation income earned under an
employer-employee relationship, passive income subject to final taxes (under
Sections 24, 25, 27, and 28 of the Tax Code), and income excluded under
Section 32(B) of the Tax Code.

3. Purpose of Grouping & Concessions for Micro and Small Taxpayers

The segmentation is designed for responsive tax administration and to provide civil
penalty concessions to Micro and Small taxpayers:
​ Reduced Surcharge: Surcharge rate is reduced to 10%.
​ Reduced Interest: Interest rate on deficiencies is reduced to 6%.
​ Reduced Information Return Penalty: Penalty for failure to file certain
information returns is reduced to P500.
​ Reduced Compromise Penalty: Compromise penalty rate is reduced to 50% on
violations involving invoicing or the printing of invoices.
​ Simplified Forms: The Income Tax Return (ITR) length is condensed to two (2)
pages only.
CRITICAL NOTE: Micro and small taxpayers are still required to withhold taxes as
mandated by law. An exemption from this withholding obligation was explicitly vetoed
by the President.

II. Tax Benefits & Special Provisions for Vulnerable Sectors

Even when categorized into special sectors, individual taxpayers remain subject to
specific rules regarding alternative internal revenue taxes.

1. Summary of Sector-Specific Discounts & VAT Exemptions

​ Senior Citizens and PWDs: * Exemption from VAT on the purchase of specified
goods and services.
​ 20% discount on the purchase of specified goods and services.
​ 5% discount on basic and prime commodities.
​ Solo Parents:
​ Exemption from VAT on their purchase of specified goods.
​ 10% discount on their purchase of specified goods.
2. Other Applicable Internal Revenue Taxes
Senior Citizens, PWDs, or Solo Parents who are self-employed, engaged in business,
or practicing a profession are still subject to:
​ Capital Gains Tax (Sec. 24(C)): Imposed on sales of shares of stock not traded
in the local stock exchange.
​ 6% Final Withholding Tax (Sec. 24(D)): Presumed capital gains from the sale of
real property classified as a capital asset (except if capital gains are realized from
disposing of a principal residence).
​ Value Added Tax (VAT): Mandated if gross annual sales/receipts exceed the
statutory threshold of P3,000,000.
​ Percentage Tax (Sec. 116): Mandated if gross annual sales/receipts fall below
the P3,000,000 threshold and they are not VAT-registered.
​ Other Forms: Subject to Donor’s Tax (on calendar-year donations), Estate Tax
(upon death), Excise Tax on certain products, and Documentary Stamp Tax
(DST).

III. Compliance Framework: Filing & Payment Mechanics

1. Place/Venue of Filing & Payment (EOPTA Updates)
The Ease of Paying Taxes Act fundamentally changed the jurisdiction rules for filing
returns:
​ Under RA 11976 (EOPTA): Taxpayers can file returns and pay taxes to ANY
Authorized Agent Bank (AAB), Revenue Collection Officer (RCO), or Authorized
Tax Software Provider (ATSP), regardless of jurisdiction.
​ Prior to RA 11976: Taxpayers were strictly required to file and pay within the
specific city or municipality where the person had their legal residence or
principal place of business.

2. Modes of Filing and Payment (RR 4-2024)

A. Electronic Filing & Payment
Accomplished online using approved digital environments:
​ BIR Platforms: Electronic Filing and Payment System (EFPS) or eBIR Forms.
​ Payment Channels: AAB ePayment channels (e.g., LinkBiz, PesoNet, UPay,
MyEG) or standard online banking platforms.
​ ATSPs: Third-party Authorized Tax Software Providers certified by the BIR.
​ Historical Context: Prior to EOPTA, EFPS acted as the direct-deduction online
interactive version, while eBIR Forms functioned as an offline/desktop filing
software with manual or limited bank-side online settlement features.

B. Manual Filing & Payment

Accomplished by writing or utilizing electronic assistance, but submitted physically
over-the-counter.
​ Over-the-Counter Windows: Filed via an AAB or an RCO.
​ RCO Limitations: Revenue Collection Officers can only accept physical cash
payments up to P20,000. However, check payments can be accepted
regardless of the amount.
​ Sequencing Rule: AABs and RCOs will only accept manual tax payments after
the taxpayer has already filed the return electronically, unless an official advisory
permits full manual filing.

IV. Income Tax Returns (ITR) Timeline & Forms Directory

1. When to File and Pay Income Tax
A. Purely Compensation Income Earners
​ Frequency: Once a year.
​ Deadline: On or before April 15 of the following year.
​ Prescribed Form: BIR Form No. 1700.

B. Business and/or Mixed Income Earners (Including Professionals)

Required to file both quarterly and annual returns:
​ Quarterly Base (BIR Form 1701Q):
​ 1st Quarter: May 15
​ 2nd Quarter: August 15 (or 45 days after the end of the quarter)
​ 3rd Quarter: November 15 (or 45 days after the end of the quarter)
​ Annual Base: On or before April 15 of the following year using BIR Form 1701
or Form 1701A.

2. BIR Forms Breakdown

​ BIR Form 1700: Filed annually by individuals earning purely compensation
income, including individuals with non-business-related income.
​ BIR Form 1701: Filed annually by individuals engaged in trade/business or the
practice of a profession, including mixed-income earners.
​ BIR Form 1701A: Filed annually by individuals earning purely from
business/profession who are either subject to graduated income tax rates
utilizing the Optional Standard Deduction (OSD) or who opted to avail of the
8% flat income tax rate.
​ BIR Form 1701Q: Filed quarterly by:
​ Resident citizens engaged in trade, business, or profession within and
outside the Philippines.
 ​ Resident aliens, non-resident citizens, or non-resident aliens engaged in
trade, business, or profession within the Philippines.
​ Fiduciaries (trustees, guardians of minors, executors/administrators of
estates) where the underlying trust or estate is engaged in trade or
business.

V. Mandatory Filing vs. Exemptions & Substituted Filing

1. Taxpayers Required to File an ITR
​ Individuals engaged in business and/or the practice of a profession, regardless
of the final financial results of operations.
​ Individuals not qualified for Substituted Filing (see below).
​ Individuals deriving other non-business, non-profession-related income in
addition to compensation that is not otherwise subject to final taxes.
​ Non-resident aliens engaged in trade or business in the Philippines (NRAETB)
deriving compensation, business, or non-business income from Philippine
sources.

2. Taxpayers Exempt from Filing an ITR (EOPTA & RR 4-2024 Rules)

​ An individual earning purely compensation income whose taxable income does
not exceed P250,000.
​ An individual whose sole income has been subjected to Final Withholding Tax
(FWT).
​ Minimum Wage Earners (MWEs).
​ An individual citizen of the Philippines working and deriving income solely from
abroad as an Overseas Contract Worker (OCW) or Overseas Filipino Worker
(OFW) under RA 11641.
​ An individual who qualifies under the Substituted Filing of ITR rules.

3. Substituted Filing Framework

An employee is exempt from filing their own annual ITR (Form 1700) because the
employer's submitted information substitutes it.

Requirements for Substituted Filing:

​ The individual must derive income purely from a single employer during the
taxable year.
​ The tax due must match the tax withheld correctly by the employer.
​ The employer must file a stamped, certified list of qualified employees with the
Bureau of Internal Revenue (BIR).
Taxpayers Explicitly Disqualified from Substituted Filing:
​ Individuals deriving compensation from two or more concurrent or successive
employers at any time during the taxable year.
​ Individuals whose tax has not been withheld correctly, resulting in a collectible
or refundable balance return.
​ Repealed Rule: Previously, individuals whose spouses were required to file an
ITR were disqualified. This is no longer a requirement under EOPTA.

4. Employer Reporting Obligations: BIR Form 2316

Under Section 2.83 of RR 2-98:
​ Employers must furnish every employee (including minimum wage earners) with
BIR Form 2316 on or before January 31 of the succeeding calendar year.
​ If employment is terminated before the close of the calendar year, Form 2316
must be issued on the day the last payment of compensation is made.
​ Penalty Case: Failure to furnish Form 2316 constitutes grounds for a mandatory
audit of the employer’s overall income tax and withholding tax liabilities upon a
verified complaint from the employee.

VI. Non-ITR Specific Taxes: Timelines & Form Matchings

1. Fringe Benefit Tax (FBT)
​ Filing Frequency: Quarterly basis.
​ Timeline: Not later than the last day of the month following the close of the
quarter during which withholding occurred.
​ Form: BIR Form 1603Q (pursuant to RR 11-2018).

2. Final Withholding Tax (FWT) on Passive Income

​ Filing Frequency: Quarterly basis.
​ Timeline: Not later than the last day of the month following the close of the
quarter during which withholding occurred.
​ Forms: BIR Forms 1601-FQ and 1602Q.

3. Capital Gains Tax (CGT) Framework

A. Shares of Stock (Domestic Corporations NOT Listed/Traded in the Local Stock
Exchange)
​ Ordinary Return: Filed and paid within 30 days following each individual sale
or disposition transaction.
​ Form: BIR Form 1707.
​ Annual Consolidated Return: Filed on or before April 15 of the following year,
covering all stock transactions from the preceding taxable year.
B. Real Property (Classified as Capital Asset Located within the Philippines)
​ Standard Return: Filed and paid within 30 days following each sale,
exchange, or disposition transaction.
​ Form: BIR Form 1706.
​ Installment Sales Case: The return must be filed within 30 days following the
receipt of the 1st down payment, and subsequently within 30 days following
each consecutive installment payment.
​ Transaction Consolidation Rule: Exactly one return is filed for each distinct
transfer document, regardless of how many individual properties are sold,
exchanged, or disposed of within that specific document.

VII. Statutory Definition of Terms (Section 9)

​ Person: An individual, a trust, an estate, or a corporation.
​ Filing of Return: The act of completing and submitting the prescribed tax return,
electronically or manually, to the BIR, or through any Authorized Agent Bank
(AAB) or Authorized Tax Software Provider (ATSP) approved by the Bureau.
​ Payment of Tax / Remittance of Tax: The act of delivering the exact amount of
tax due or tax withheld, either electronically or manually, to the BIR, AAB, or
ATSP.
​ Authorized Agent Banks (AABs): Financial institutions accredited to collect
internal revenue tax payments directly on behalf of the BIR.
​ Revenue Collection Officers (RCOs): Dedicated BIR internal officers tasked
with accepting tax payments under explicit regulatory limitations and remitting
those collected funds within a prescribed timeframe.
​ Authorized Tax Software Provider (ATSP): An individual or independent
organization whose business model provides electronic tax filing and/or payment
solutions to taxpayers via third-party systems certified by the BIR.
​ Overseas Filipino Worker (OFW) / Migrant Worker: A citizen of the Philippines
who is to be engaged, is engaged, or has been engaged in a remunerated
activity in a country of which he/she is not an immigrant, citizen, or permanent
resident. Exclusion: This explicitly excludes citizens participating in
government-recognized exchange visitor programs for cultural or educational
purposes.

VIII. Practical Illustrations & Tax Case Datasets

Illustration 16: Professional Practice Tax Case (Graduated Rates)
Case Facts:
Juan Dela Cruz is a practicing CPA with four dependent children. He provided the
following operating figures for the taxable year:
​ Gross Sales: P10,000,000
 ​ Direct Costs and Expenses: P5,000,000
​ Creditable Withholding Taxes (CWT): P1,250,000

Mathematical Computation:

Gross Sales=P10,000,000

Less: Direct Cost and Expenses=(P5,000,000)

Taxable Net Income=P5,000,000

Graduated Tax Calculation Breakdown:

​ Tax on the first P2,000,000 base = P402,500
​ Tax on the excess over P2,000,000 (P3,000,000 excess × 30%) = P900,000
​ Total Income Tax Due = P1,302,500
​ Less: Creditable Withholding Taxes (CWT) = (P1,250,000)
​ Net Income Tax Payable = P52,500

Case Analysis & Compliance Rules:

​ Juan is strictly required to file quarterly and annual income tax returns.
​ Form-collected creditable withholding taxes are deducted directly from his final
calculated year-end tax due.
​ He is legally permitted to pay his final annual income tax payable in two (2)
equal annual installments.
​ In addition to basic income tax, his status as a practicing professional requires
the assessment and payment of business taxes (VAT, as his gross sales exceed
P3M).

Mixed Income Tax Case Dataset

The textbook provides the following comprehensive data setup for a mixed-income
earner to evaluate filing choices.

Case Facts:
Juan Dela Cruz is a self-employed resident citizen who also concurrently serves as the
Finance Manager of Omega Corporation. The following financial information was
recorded for the taxable year:
 Income / Expense Line Item Amount

Compensation Income P1,800,000

13th Month Pay and Other Benefits P150,000

Gross Sales (Business) P2,800,000

Cost of Sales P1,125,000

Business Expenses P650,000

Interest Income from Peso Bank Deposit P80,000

Interest Income from Bank Deposit P120,000

under FCDS

Gain on Sale of Land in the Philippines Zonal Value: P1,200,000)*

held as Capital Asset *(Cost:
P1,500,000

Creditable Withholding Tax on P448,000

Compensation Income
 Creditable Withholding Tax on Sale of P28,000
Goods

Analytical Evaluation Questions:

​ How much is the Income Tax Payable of Juan assuming he opted to be taxed at
the 8% preferential tax rate?
​ How much is his total income tax expense assuming he opted to be taxed at the
8% preferential tax rate?