Income Tax

on
Individuals
PART II
ALLOWABLE DEDUCTIONS FOR INDIVIDUAL
TAXPAYERS

COMPENSATION BUSINESS INCOME SPECIAL ITEMIZED

INCOME ITEMIZED/OSD ALLOWABLE
0% DEDUCTION.
ALLOWABLE DEDUCTIONS FOR INDIVIDUAL
TAXPAYERS
1. Compensation Income – for individuals earning purely compensation income, there is no
allowable deduction. However, the first P250,000 of their income is
subject to 0% income tax.
2. Business Income – for those earning business income or income from the practice of
profession, the individual is allowed to claim itemized deductions or the
optional standard deduction. If they earn income purely from business or practice of profession,
the first P250,000 of such income is deductible from their gross
sales/receipts if they opt to avail of the 8% flat rate of income tax. Otherwise, if they avail of the
graduated rates or failed to signify that they are availing of
the 8% flat rate of income tax, the first P250,000 is subject to 0% income tax therein.
ALLOWABLE DEDUCTIONS FOR INDIVIDUAL
TAXPAYERS
1. Itemized Deductions (Sec. 34 of the Tax Code)

Expenses incurred in conducting the business or in the practice of profession are

allowed as deductions for income tax purposes provided that they meet all the
requirements for deductibility.

2. Optional Standard Deduction (OSD)

In lieu of the itemized (per item) expenses mentioned above, the Individual may opt to
claim Optional Standard Deduction. Accordingly, no other deductions for expenses, such
as Cost of Sales, Cost of Services, Rent, Selling or any Administrative Expenses, or
other business expenses or those incurred in the practice of profession, shall be
allowed.
ALLOWABLE DEDUCTIONS FOR INDIVIDUAL
TAXPAYERS
3. Special Allowable Itemized Deductions
In addition to the regular itemized deductions, these are the deductions allowed by regular and
special laws such as Rooming-in and Breast-feeding Practices under RA 7600, Adopt a School
Program under RA 8525, Senior Citizen Discount under RA 9257, etc.
All of the above deductions (no. 1 to 3) are not available:
a. Against compensation income – no deductions are allowed for a taxpayer who is a purely
compensation income earner. If the taxpayer is a mixed-income earner, the deductions are
available only against the business income or income from practice of profession and not
against compensation income.
b. If the taxpayer opted to avail the 8% income tax since the tax base for this tax is gross
sales/receipts (before the above deductions, including costs of sales)
Sample Problems
Habib operates a convenience store while he offers
bookkeeping services to his clients. In 2018, his gross sales
amounted to P800,000.00, in addition to his receipts from
bookkeeping services of P300,000.00 and incurred costs and
expenses of P300,000 and P100,000, respectively. How much
is his tax due using the 8% tax rate?
Sample Problems
In the above illustration, Mx. X likewise earned P1,000,000
from employment with XYZ Company for which P180,000 was
tax withheld and remitted to the BIR. How much is her income
tax due and payable?
Sample Problems
Mr. ABC earned P3,000,000 on his practice of profession for
the first three quarters of 2018 for which he filed quarterly
income tax returns and availed of the 8% income tax rate, and
on the fourth quarter, he earned P3,500,000. For the taxable
year, he incurred cost of sales and operating expenses
amounting to P3,000,000 and P1,440,000, respectively. How
much is his tax due and tax still payable for taxable year 2018?
 Graduated Table
The above rates shall apply to:
a. Purely compensation income earners
b. Mixed income earners as regards their compensation income
c. Those earning income from business or practice of profession whose sales/receipts and other income
EXCEEDS P3,000,000
d. Those earning income from business or practice of profession whose sales/receipts and other income DOES
NOT exceed P3,000,000 and the taxpayer opted to avail of the graduated income tax rates or opted to avail of
optional VAT registration.
e. Those who failed to signify that they are availing the 8% flat rate in their 1st quarter income tax return.
f. Those who are not allowed to avail the 8% flat rate of income tax.
 8%
The following are not allowed to avail of the 8% flat rate of income tax:

1. Purely compensation income earners.

2. VAT-registered taxpayers, regardless of the amount of gross sales/receipts and other non-operating income.

3. Non-VAT taxpayers whose gross sales/receipts exceed P3,000,000 VAT threshold.

4. Taxpayers who are subject to percentage taxes other than the 3% OPT under Sec. 116 (e.g., those subject to common
carrier’s tax, amusement tax, gross receipts tax, etc.)

5. Partners of GPPs as to their share in the net income thereof (note, however, that they can still claim the 8% flat rate of income
tax as to their own business income, provided the gross sales/receipts thereof do not exceed P3,000,000). This is because their
share is already net of applicable costs and expenses; and

6. Individuals enjoying income tax exemption such as those registered under the Barangay Micro Business Enterprises (BMBEs),
etc., since taxpayers are not allowed to avail of double or multiple tax exemptions under different laws unless specifically
provided by law. (Q&A 16, RMC No. 50-2018)
 Alien individuals employed by:
a. Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies
– 15% of gross income received from such establishment. Provided, that the same tax treatment shall apply
to Filipinos employed and occupying the same position as those of aliens employed by these multinational
companies. (Sec. 25[C])
b. Offshore Banking Units (OBUs) – 15% of gross income therefrom. Provided, that the same treatment
shall apply to Filipinos employed and occupying the same position as those aliens employed by these
OBUs. (Sec. 25[D])
c. Petroleum Service Contractor and Subcontractor – 15% of the salaries, wages, annuities,
compensation, remuneration and other emoluments, such as honoraria and allowances received from such
contractor or subcontractor with the same preferential treatment for Filipino employees therein. (Sec. 25[E])
d. Any other income from all sources within the Philippines by the above alien employees shall be
subject to the pertinent income tax, as the case may be, imposed under the Tax Code
Aliens individuals employed by:
Multinational Companies means a foreign firm or entity engaged in international trade
with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other
foreign markets.
Requirements: for a Filipino employed by an ROHQ/AHQ/RHQs to qualify for the 15%
preferential tax rate, the following requisites must be present:
a. The employee must be performing a managerial or technical position;
b. The gross compensation, exclusive of fringe benefits subject to FBT, must be at
least P975,000.
c. The employee must be exclusively working for the RHQ or ROHQ as a regular
employee and not just a consultant or contractual personnel. (RR No. 11-10)
Non-resident aliens NOT engaged in trade
or business:
Except for sale of capital assets (shares of stock and real property)
covered by Sec. 24 (C) and (D) of the Tax Code, the entire income
received from all sources within the Philippines by every
non-resident alien NOT engaged in trade or business within the
Philippines such as interest, cash and/or property dividends, rents,
salaries, wages, premiums, annuities, compensation, remuneration,
emoluments, or other fixed or determinable annual or periodic or
casual gains, profits and income, and capital gains – the applicable
tax rate is 25% (Sec. 25[B])
RULES ON SITUS (whether earned within or
outside the Philippines):
1. Interest – the situs of interest income is the residence of the debtor. Thus, if the debtor is a resident of the
Philippines, it is considered earned within the Philippines.

2. Dividends – the following are considered earned WITHIN the Philippines, dividends received from:

a. A domestic corporation;

b. A foreign corporation, unless less than 50% of the gross income of such foreign corporation for the 3 year period
ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as
the corporation has been in existence) was derived from sources within the Philippines; but only in an amount which
bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources
within the Philippines bear to its gross income from all sources.

In summary: if the gross income from the PH of the foreign corporation in relation to its worldwide gross income is:

i. Less than 50% - all are treated as income from without the Philippines;

ii. 50% or more – that same percentage is treated as earned within the Philippines in relation to the dividend received.
RULES ON SITUS (whether earned within or
outside the Philippines):
3. Services – where performed. Thus, if performed within the Philippines,
it is considered earned herein.
4. Rentals and Royalties – where the property is located or the place of
use of the intangible. As such, if the property or any interest in such is
located in the Philippines, rentals and royalties therefrom are considered
earned within the Philippines.
5. Sale of real property – where the real property is located. As such,
gains, profits and income from the sale of real property located in the
Philippines are considered earned herein.
RULES ON SITUS (whether earned within or
outside the Philippines):
6. Sale of Personal Property

Purchase: where the property is sold. If the personal property was purchased outside the
Philippines, but sold herein, the gains, profits and income derived therefrom are
considered earned within the Philippines. On the other hand, even if it was purchased in
the Philippines and sold outside, gains therefrom shall be treated earned from outside
the Philippines.

Produced: if the personal property is produced in the Philippines and sold outside, it
shall be treated as derived from sources partly within and partly without the Philippines.
(see no. 7)

Except: sale of shares of stock of a domestic corporation, which shall be considered

entirely within the Philippines even if sold outside.
RULES ON SITUS (whether earned within or
outside the Philippines):
Income partly within and partly without the Philippines: aside from sale of personal
property produced in the Philippines, income from transportation and other services
rendered partly within and partly without, is covered by this number.

In these cases, the net income may first be computed by deducting the expenses,
losses, or other deductions apportioned or allocated thereto and a ratable part of any
expenses, losses or other deductions which cannot definitely be allocated to some items
or class of gross income; and the portion of such net income attributable to sources
within the Philippines may be determined by processes and formulas of general
apportionment prescribed by the Secretary of Finance.
PASSIVE INCOME
There are items of passive income which are specifically
enumerated in the Tax Code as subject to final withholding tax
and thus are not included in the Gross Income of the Taxpayer
for purposes of computing his taxable income subject to the
graduated/scheduler/basic income tax or the 8% tax rate.
The final withholding tax is the amount of tax which constitutes
the full and final payment of the income tax due from the payee
of the said income.
PASSIVE INCOME
Remittance of the Tax:
The liability for the payment of the tax rests primarily on the
payor as a withholding agent. Thus, in case of his failure to
withhold the tax or in case of under withholding, the deficiency
tax shall be collected from the payor/withholding agent. The
payee is not required to include the income subject to final
withholding tax to his gross income subject to income tax.
The final tax is withheld at source; thus, the income earner
need not file a return for the income subjected to Final Tax.
PASSIVE INCOME – RC,NRC and RA
PASSIVE INCOME - NRAE
 PASSIVE INCOME
*The TRAIN did not amend Section 25(A)(2) providing for the 20% Final Withholding Tax for NRAETB. As it is, the winnings from
Philippine Charity Sweepstakes and Lotto are still considered exempt.
A NRAETB is subject to the same rates as that of a citizen or resident alien, except for the following:
1. Dividend Income – 20%;
2. Philippine Charity Sweepstakes and Lotto Winnings – exempt still under the TRAIN.
3. Interest Income from FCDUs – exempt.
Income derived from the foreign currency deposit system: for non-residents (whether individual or corporation), ANY income derived
from foreign currency
deposit units of banks are EXEMPT from tax. (Sec. 27[D][3], last par. of the Tax Code)
Non-Resident Aliens NOT engaged in trade or business are subject to the 25% Final Tax on his entire income, save for capital
gains on shares of stocks not listed or traded in a local stock exchange. The above rates do not apply.
However still, a NRANETB’s income from an FCDU is exempt because he is still a non-resident