CLASSIFICATION OF INDIVIDUAL TAXPAYERS

For income tax purposes, individual taxpayers are classified as follows:

1. Resident citizen. An individual whose residence is within the Philippines and who is a citizen thereof.

2. Non-resident citizen.- Is a citizen who:

a. Establishes to the satisfaction of the Commissioner the fact of his physical presence abroad, with a
definite intention to reside therein;

b, Leaves the Philippines during the taxable year to reside abroad. either as an immigrant or for
employment on a permanent basis;

c. Works and derives income from abroad and whose employment thereat requires him to be physically
present abroad most of the time (not less than 183 days) during the taxable year;

A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at
any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a
nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income
derived from sources abroad until the date of his arrival in the Philippines (Sec. 22/E, NIRC).

3. Resident alien means any individual whose residence is within the Philippines and who is not a citizen
thereof.

4. Nonresident alien means an individual whose residence is not within the Philippines and who is not a
citizen thereof. A nonresident alien is classified into:

(a) Engaged in trade or business in the Philippines (ETB) - refers to a non-resident alien who shall come
to the Philippines and stay for an aggregate period of more than one hundred eighty (180) days during
any calendar year; or

(b) Not engaged in trade or business in the Philippines (NETB) - refers to a non-resident alien who shall
come to the Philippines and stay for an aggregate period of one hundred eighty (180) days or less during
any calendar year.

GENERAL PRINCIPLES OF INCOME TAXATION ON INDIVIDUALS

1. A resident citizen is taxable on income derived from sources within and without the Philippines;
2. A nonresident citizen is taxable only on income derived from sources within the Philippines;
3. A citizen of the Philippines who is working and deriving income from abroad as an overseas contract
worker is taxable only on income from sources within the Philippines,
4. An alien individual, whether a resident or not of the Philippines is taxable only on income derived
from sources within the Philippines (Sèc. 23,ibid.).

Table 1

The following table summarizes the situs of taxable income of individual taxpayers.

Individual Taxpayer Income Within Income Without

1. Resident Citizen Taxable Taxable

2. Resident Alien Taxable Not Taxable

3. Nonresident Citizen Taxable Not Taxable

4. Nonresident Alien (ETB) Taxable Not Taxable

5. Nonresident Alien (NETB) Taxable Not Taxable

TAX ON INCOME EARNINGS AND MONEY REMITTANCES OF OVERSEAS CONTRACT WORKERS

(OCW)/OVERSEAS FILIPINO WORKERS (OFW)

Overseas Contract Worker (OCW) refer to Filipino citizens employed in foreign countries, commonly
reffered to as OFW'S, who are physically present in foreign country as a consequence of their
employment thereat.

Their salaries and wages are paid by an employer abroad and is not borne by any entity or person in the
Philippines. To be considered as an OCW or OFW, they must be truly registered as such with the
Philippine Overseas Employment Administration (POEA) witha valid Overseas Employment Certificate
(OEC) (Rev. Regu. 1-2011).

Seafarers or seamen are Filipino citizen who receive compensation for services rendered abroad as
member of the complement of a vessel engaged exclusively in international trade.

To be considered as an OCW or OFW they must be duly registered as such with the POEA and with valid
Overseas Emplyment Certificate (OEC) with a valid Seafarers ldentiticaion Record Book (SIRB) ar
Seaman's Book issued by the Maritime Industry Authority (MARINA).

An OCW is taxable only on income from sources within the Philippines. Thus, OCW or OFW's income
arising out of his employment is exempt from income tax.
If an OCW or OFW has income eamings from business activities or properties within the Philippines, such
income eamings are subject to regular income tax.

However, it shall be exempt from 15% final tax on interest income from a depository bank under the
expanded foreign currency deposit system upon presentation of proof of non-residency such as OEC or
Seaman's Book.

1f an account is in the name of the OCW or a Filipino seaman, and an individual (spouse or dependent)
who is living in the Philippines, fifty percent (50%) of the interest income from such bank deposit will be
treated as excempt while the other fifty percent (50%) shall be subject to a final withholding tax of 15%.

Kinds of Income of Individual Taxpayer

1. Compensation income - in general, means all remuneration for services performed by an employee
for his employer under an employer-employee relationship, unless specifically excluded by the Code.

The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages,
emoluments and honoraria, allowances, commisions (e.g. transportation. representation, entertainment
and the like); fees including director's fees, if the director is, at the same time, an empioyee of the
employer corporation; taxable bonuses and fringe benefits, except those which are subject to the fringe
benefits, except those which are subject to the fringe benefits tax and allowable "de minimis" benefits;
taxable pensions and retirement pay; and other income of a similar nature constitute compensation
income.

2. Business income - earned by a sole proprietor or an independent contractor who reports income
earned from self-employment. He or she controls who he or she works for, how the work is done and
when it is done. It includes those hired under a contract of service or job order.

3. Professional income - by professionals whose income is derived purely from the practice of profession
and not under an employer-employee relationship.

4. Passive income - income earned without working actively; they are subject to different final
withholding tax rates.

INCOME TAX RATES

Tables 2 and 3 below provide the schedule of income tax rates:

Table 2

Effective January 1, 2018 until December 31, 2022, if the taxable income is:
 Over Not Over Tax Plus Of excess over

P250,000 0%

P250,000 400,000 20% - 250,000

400,000 800,000 P30,000 25% 400,000

800,000 2,000,000 130,000 30% 800,000

2,000,000 8,000,000 490,000 32% 2,000,000

8,000,000 2,410,000 35% 8,000,000

Table 3

Effective January 1, 2023 and onwards

Over Not Over Tax Plus Of excess over

P250,000 0%

P250,000 400,000 15% - 250,000

400,000 800,000 P22,500 20% 400,000

800,000 2,000,000 102,500 25% 800,000

2,000,000 8,000,000 402,500 30% 2,000,000

8,000,000 2,202,500 35% 8,000,000

For married individuals, the husband and wife shall compute separately their individual income tax
based on their respective total taxable incomes.

Provided, that if any income cannot be definitely attributed to or identifed as income exclusively earned
or realized by either of the spouses, the same shall be divided equally between the spouses for the
purpose of detemining their respective taxable income.

Example:
Ana, married, supporting her mother and two minor children, has the following income and expenses:

Salary P80,000
Allowances 6,000
Professional income as CPA 25,000
Gross income from business 200,000
Expenses-practice of profession 5,600
Expenses- business 130,000

REQUIRED: Compute for the income tax due using the graduated rates of tax.

Answer:

Salary P80,000
Allowances 6,000
Professional income as CPA 25,000
Business Income 200,000
Total 311,000
Less: Deductions
Expenses-practice of profession 5,600
Expenses- business 130,000 135,600
Taxable income 175,400

Tax on P175,000 Exempt

TAX ON NONRESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS (NRA ETB)

To engage in trade or business within the Philippines is construed as signifying to follow the employment
or occupation which occupies the time, attention and labor for the purpose of a livelihood or profit
(Semple vs. Guenther, 96 N.w. 895, 896) it denotes habituality or sustained activity.

The term trade or business' includes the performance of the functions of a public office (Sec. 22, op. cit).
A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period
of more tnan 180 days during any calendar year shall be deemed a nonresident alien doing business in
the Philippines.

In general, the income tax rates applicable to shall be the rates imposed on individual citizen and a
resident alien individual on the taxable income derived within the Philippines;

A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an
income tax in the same manner as an individual citizen and a resident alien individual, on taxable income
received from ali sources within the Philippines (ibid.).

Example:

In 2018, Bryant, marmied with one dependent child, a foreign citizen residing abroad but engaged in
business in the Philippines, derived an income abroad of U.S. $120,000 (U.S $1.00: P50) and P150,000 in
the Philippines.

His country grants a personal exemption of P30,000 on married individuals and P7,000 on every
dependent child.

Compute the income tax due on Bryant.

Answer:

Gross income, Philippines P 150,000

Tax on P150,000 Exempt

1. Nonresident aliens are taxable only on income derived from sources within the Philippines.

2. Individual taxpayers are not entitled to claim personal exemptions.

INCOME EARNED BY ALIEN EMPLOYEES

All concerned employees of the regional or area headquarters and regional operating headquarters of
multinational companies, offshore banking units and petroleum service contractor and subcontractors
shall be subject to the regular income tax rates in Table 2 of this chapter, without prejudice to the
application of preferential tax rates under existing international tax treaties, if warranted.

Example:
Don Hump, an alien employed in Far-In Corporation that is a Petroleum Service Contractor, received
compensation income of P4,000,000 for 2018, inclusive of P200,000 13th month pay and other benefits.

COMPUTE for the income tax due on Don Hump.

Answer:

Compensation income P4,000,000

Less: 13th month pay and other benefits 90,00O
Taxable compensation income 3,910,000
Tax on P2,000,000 P 490,000
1,910,000 x 32% 611,200
Income tax due 1,101,200

As a rule, employees of RHQS/ROHQS/OBUs, and Petroleun Service Contractors and Subcontractors shall
be subject to regular income tax rate.