TAX ON INDIVIDUALS Above 800,000 to 102,500 + 25% of excess

- Basic Taxes 2,000,000 over 800,000

Above 2,000,000 to 402,500 + 30% of excess
Different kinds of taxpayers: 8,000,000 over 2,000,000
- Resident Citizen (RC) Above 8,000,000 2,202,500 + 35% of
- Non-resident Citizen (NRC) excess over 8,000,000
- Resident Alien (RA)
- Non-resident Alien Engaged in Trade/Business Classifications of Individual Taxpayers:
(NRAETB) - Pure Compensation
- Non-resident Alien Not Engaged in  The source of income of the individual is
Trade/Business (NRANETB) purely from compensation or Employee-
Employer relationship.
Subject to Tax:  Subject to Graduated/Regular/Normal or
- RC – all income within and without PH Progressive Rate (Tax Table).
- NRC, RA, NRAETB, & NRANETB – all income - Mixed Income
within PH only.  The individual is receiving income from
compensation and business. A combination
Tax Basis: of compensation and business income. The
- RC, NRC, RA, & NRAETB – Net Taxable Income individual is an employee and at the same
(NTI) time engaged in trade/business or practice of
- NRANETB – Gross Income (GI) profession.
 Compensation + Business
Tax Rate:
 The compensation income will be subject to
- RC, NRC, RA, & NRAETB – Regular/Basic Tax
graduated rate.
based on the income tax table
 The business income will be subject to VAT
- NRANETB – 25% Final Tax based on their Gross
and Percentage Tax.
Income
 If VAT, s/he will be subject to graduated
rate.
INCOME TAX TABLE UNDER TRAIN LAW
 If Percentage, s/he will be subject to
(Part 1 – Applicable from Year 2018 to 2022)
graduated rate + 3% or 8% of gross
ANNUAL INCOME TAX RATE
sale/receipt, in lieu of income tax and
250,000 and below None (0%)
3%.
Above 250,000 to 20% of excess over  The 3% in VAT will only apply in the
400,000 250,000 business income only.
Above 400,000 to 30,000 + 25% of excess  The 8% preferential rate will no longer be
800,000 over 400,000 exempting 250,000 since it is already
Above 800,000 to 130,000 + 30% of excess covered by the compensation.
2,000,000 over 800,000 - Pure Business
Above 2,000,000 to 490,000 + 32% of excess  The source of income of the taxpayer is
8,000,000 over 2,000,000 coming from business meaning the taxpayer
Above 8,000,000 2,410,000 + 35% of is engaged in trade/business or practice of
excess over 8,000,000 profession. Not receiving an income as an
employee.
PERSONAL INCOME TAX  Must to classify if subject to VAT or
(2023 onwards) Percentage Tax.
ANNUAL INCOME TAX RATE  If VAT, always subjected to graduated
250,000 and below None (0%) rate.
Above 250,000 to 15% of excess over  If Percentage Tax, may be subjected to
400,000 250,000 graduated rate + 3%, or 8% of gross
Above 400,000 to 22,500 + 20% of excess sales/receipt in excess of 250,000, in lieu
800,000 over 400,000 of income tax and 3%.
  Graduated Rate – Tax Due
600K + 700k = 1,300,000 – 800,000
Business Taxpayer 500,000 * 30% = 150,000 + 130,000
- S/he is subject to Income Tax and Business Tax. 280K + (2.3M * 3%) = 349,000
- Business Tax: Value Added Tax (VAT) and  Percentage Rate – Tax Due
Percentage taxes. 80,000 + (2,300,00 * 8%) = 264,000
 S/he is subject to VAT, if Gross
Sales/Receipts > 3M What if? The taxpayer opted to select the 8%
 S/he is subject to 3% tax, if Gross preferential rate in the first quarter because s/he believes
Sales/Receipts < or = 3M; generally, at 3% of that his/her gross sales/receipts will not exceed
GS/GR. 3,000,000. Unexpectedly, in the third/fourth quarter the
- Therefore, a business taxpayer can be subjected total sales or gross sales/receipts now exceeds
to VAT or Percentage taxes depending the 3,000,000 which would disqualify him/her from using the
amount of his/her gross sales or gross income. preferential rate but it is said to be irrevocable. What will
happen now? What is the proper tax treatment? Will this
NOTE: When should the taxpayer manifest, if he opted to be resolved in favor of the taxpayer or of the
be subjected to graduated rate or to the 8% preferential government?
rate? - It is in favor of the government. It will now be
- The taxpayer must select at the start of the year subjected to graduated rate from the very
whether s/he opt to be subjected to graduated beginning or from the very first month of the year.
rate or 8% preferential rate. What will now happen to the 8% preferential rate
- The same with OSD or itemized, the taxpayer payments made?
must choose upon filing of the first quarter - These payments made will considered as tax
income tax return whether s/he will be subjected credit against the regular income.
to graduated rate or to 8% at his option. - It will now be computed based on the graduated
- S/he can select only on the first quarter of the rate minus whatever is paid under the 8%
year and it is also irrevocable for a period of one preferential rate.
year.
- Therefore, the taxpayer cannot change the Example:
selected scheme whether graduated or Q01 Q02 Q03 Q04
preferential rate once s/he selected one in the GS 800,000 1,000,000 1,000,000 1,000,000
first quarter income tax returns. COS 300,000 500,000 400,000 600,000
AD 200,000 300,000 300,000 100,000
Example:
1. Compensation = P 600,000 Total Gross Sales
 Graduated Rate – Tax Due Q1 800,000 Q2 1,800,000
600K – 400K = 200K * 25% Q3 2,600,000 Q4 3,800,000
50K + 30K = 80,000 3,800,000 – 1,800,000 = 2,000,000 – 900,000 =
2. Gross Sales P 2,000,000 1,100,000
Cost of Sales 800,000
Gross Income 1,200,000 Q1 to Q3 = 8% Preferential Rate
Other Income 300,000 Q4 = Graduated Rate
Total GI 1,500,000
AD 800,000 TD 44,000 124,000 204,000 220,000
NTI 700,000 TC - 44,000 124,000 204,000
 Graduated Rate – Tax Due TP 44,000 80,000 80,000 16,000
700K – 400K = 300K * 25%
75K + 30K = 105,000 What are the Tax Credits available for individuals?
 Percentage Rate – Tax Due 1. Creditable Withholding Tax
[(2M + 300K) – 250k] * 8% 2. Advanced Tax Payments
(2,050,000) * 8% = 164,000 3. Quarterly Tax Payments – applicable to second
3. Combination of both items #01 and #02. and third quarter, and annual income tax returns.
 4. Foreign Tax Payments L2:
 is available only if the taxpayer is a resident US = (1,000,000 / 3,000,000) * 618,000
citizen or domestic corporations because RC = 206,000 vs 20,000
and DC are taxable in their income within JP = (500,000 / 3,000,000) * 618,000
and without Philippines. = 103,000 vs 150,000
 Two options: L2 = 20,000 + 103,000 = 123,000
 To consider it as an Allowable Tax Credit = L1 vs L2 vs Actual; pick which is lower
Deductions – will be part of the AD and = 196,000 vs 123,000 vs 170,000
without any limit. = 123,000
 To consider it as a Tax Credit – will be
deducted from the Tax due but with limit. END OF TAX ON INDIVIDUALS

Example: TAX ON CORPORATIONS

a. One Foreign Country
Phil. US Classifications of Corporation:
GS 3,000,000 1,500,000 = 4,500,000 1. Domestic Corporation (DC)
COS 1,500,000 500,000 = (2,000,000) - One organized under the existing laws of the
AD 200,000 300,000 2,500,000 = GI Philippines.
Tax Paid 20,000 500,000 = 2. Foreign Corporation (FC)
AD - One organized under the law of a foreign
2,000,000 = country.
NTI  Resident Foreign Corporation (RFC)
Tax Due – Phil = 490,000  Nonresident Foreign Corporation (NRFC)
Tax Credit (20,000)
Tax Payable 470,000 NOTE:
- For taxation purposes, the DC and FC are also
1 Foreign Country = Limit 1 (L1) classified into Regular Corporation and Special
L1 = (GI in Foreign Country / GI World) * Phil. Income Corporation. Special Corporation is subject to
Tax special tax treatment when it comes to the
= (1,000,000 / 2,500,000) * 490,000 computation of their income taxes. For Regular,
= 196,000 it is subject to regular/normal/basic taxes.
NOTE: Compare the limit with the actual tax paid, select
the lower payment as tax credit which is favorable to the Taxability of Corporation
government. 1. DC
- All income from within and without the
b. Two Foreign Countries Philippines.
Phil. US Japan - Tax Base = Taxable Net Income; Gross Income
GS 3,000,000 1,500,000 1,000,000 less Allowable Deductions
COS 1,500,000 500,000 500,000 2. FC
AD 200,000 300,000 100,000 - Whether RFC or NRFC, All income from within
Tax Paid 20,000 150,000 Philippines only.
- RFC Tax Base = Taxable Net Income; Gross
GS 5,500,000 Tax Due 618,000 Income less Allowable Deductions
COS 2,500,000 Tax Credit 123,000 - NRFC Tax Base = 25% tax based on their Gross
GI 3,000,000 Tax Payable 495,000 Income
AD 600,000
NTI 2,400,000

2 Foreign Countries = L1 (All FC) and L2 (Per FC)

L1 = (GI in FCs / GI World) * Phil. Income Tax Due
= (1,500,000 / 3,000,000) * 618,000
= 309,000
  Taxable only on their Gross Income

NOTE:
- When we say Net Taxable Income, it is Gross
Income less Allowable Deductions. It is
applicable only for DC and RFC. It will not apply
to NRFC because they are subject to their GI,
without any Allowable Deductions.

NCIT – Tax Rate (CREATE Bill)

- Domestic Corporation
 In general,
30% - Jan 01, 1998 to June 30, 2020
25% - July 01, 2020 onwards
 If NTI < or = 5,000,000, AND Assets < or =
100,000,000, excluding land on which the
office, plant and equipment are situated.
20% - July 01, 2020 onwards

Example:
Income Tax Liability of Corporation
1. Normal/Basic Income Tax or Normal/Regular
Corporate Income Tax (NCIT)
2. Minimum Corporate Income Tax (MCIT)

Normal Corporate Income Tax

- Is imposed on corporations, DC and RFC, that
are classified as ordinary. GS 190,000,000
NTI <= 5,000,000, not
- Its concept is not applicable to a special COS 100,000,000 satisfied
corporation. GI 90,000,000 Asset <= 100,000,000,
- Two factors influencing the amount of NCIT are: AD 50,000,000 satisfied
 Tax Base NTI 40,000,000
 Tax Rate x 25%
TD 10,000,000
NCIT – Tax Base
- DC
 Net Taxable Income
 Taxable on all sources
- RFC
 Net Taxable Income within the Philippines
GI within less AD within
 If income can’t be identified whether the
income is sourced within or without the GS 190,000,000
COS 100,000,000 NTI <= 5,000,000, satisfied
Philippines, then use the following formula:
GI 90,000,000 Asset <= 100,000,000,
(Identified GI in PH / Identified GI World) satisfied
multiplied by Unidentified Gross Income to AD 85,000,000
get the GI within which would be included in NTI 5,000,000
the taxable income; (Identified GI in PH + GI x 20%
within). TD 1,000,000
- NRFC
Minimum Corporate Income Tax - NCIT and MCIT are not voluntary. It is
- A MCIT of 2% or 1% of the gross income as of mandatory.
the end of the taxable year shall be imposed on - The excess of MCIT over NCIT can be carried
both domestic and resident foreign corporations. over. There is a carry-over if the MCIT is higher
- According to the CREATE Bill, than NCIT.
 2% - January 01, 1998 to June 30, 2020
 1% - July 01, 2020 to June 30, 2023 MCIT – Guidelines Part 2
 2% - July 01, 2023 onwards - Excess MCIT
 Any excess amount of MCIT over NCIT shall
be carried forward and credited against the
- It will be multiplied to the Total Gross Income. normal income tax for the THREE YEARS
Gross Sales immediately succeeding the taxable year.
Less: Sales Discounts, Returns & Allowances  Tax Credit good for 3 years immediate
Net Sales succeeding taxable years.
Less: Cost of Sales  The principle of carrying forward the excess
Gross Income MCIT and crediting it against NCIT is only
Add: Other Income subject to Basic Taxes applicable if in the immediate succeeding
Total Gross Income three years, the NCIT is higher than MCIT.
Otherwise, the excess of MCIT cannot be
MCIT – Guidelines Part 1 credited. After the three immediate
- Applicable on the beginning of the fourth year of succeeding three years, any excess that
business operations (4+1) cannot be credited shall lose its credibility.
- Applicable even if a corporation incurs loss  After 3 years, the excess shall not or
- Applicable only to DC and RFC. The following can’t be carried over in favor of the
are not subject to MCIT: government.
 Educational Institutions  The excess MCIT can be carried over and be
 Non-Profit Proprietary Hospitals credited against the income tax due by a DC.
 Banking Institutions under the Expanded Foreign corporations, whether RFC or NRFC,
FCDS cannot claim the excess as a tax credit.
 Corporations under a special income tax
regime EXAMPLE:
- Compute the tax liability based on the gross 2020 2021 2022 2023 2024
income NCIT 10 2 5 6 5
- Starting the fourth year after the start of operation MCIT 15 1 7 8 3
(4+1), the corporate tax liability shall be based on
the NCIT or the MCIT, whichever is higher. TD 15 2 7 8 5
- Excess of MCIT less NCIT is creditable. TC - 2 - - 4
TP 15 0 7 8 1
Example: Excess 5 - 2 2 -
2010 2011 2012 2013 2014
GI 2M 3M 3M 4M 4M NOTES:
AD 2.5M 4M 3.5M 5M 4.5M - First rule, the excess shall be carried over 3
NTI (500K) (1M) (500K) (1M) (500K) years.
TD none none none none 80,000 - Second rule, it should be carried over as a Tax
MCIT Credit.
- Third rule, it can only be carried over IF on the
NOTE: year of the carry over, NCIT > MCIT.
- From first to fourth year, it will be subject to
NCIT. On the fifth year, it will be subject to NCIT EXAMPLE:
or MCIT, whichever is higher.
 Excess 45,000 - 45,000
Pays - 60,000 405,000
TP 60,000 345,000 105,000

Quarter 4 or Annual
TD 1,005,000
CWT 187,500
GS 1,400,000,000 PY 15,000
COS 560,000,000 2020 NCIT MCIT Excess 45,000
GI 840,000,000 Jan to June 30% 2% Pays 510,000
AD 150,000,000 July to Dec 25% 1% TP 247,500
NTI 690,000,000 or 20%

NCIT = 189,750,000
690,000,000/12 * 6 * 30% = 103,500,000
690,000,000/12 * 6 * 25% = 86,250,000
MCIT = 12,600,000 Special Corporations
840,000,000/12 * 6 * 2% = 8,400,000
840,000,000/12 * 6 * 1% = 4,200,000

MCIT – Guidelines Part 3

- Quarterly
 If the computed MCIT is higher than the
quarterly NCIT, the tax due shall be the
MCIT, which is 2% of the quarterly gross
income. The quarterly gross income is
computed on cumulative basis.
 If the corporate quarterly income tax is based
on the MCIT, the excess MCIT from the
previous taxable years is not creditable. The
following taxes, however, are allowed to be
applied against the quarterly MCIT due: - Subject to a special income tax rate
 Expended Withholding Tax - Subject to conditions as to when they can be
 Quarterly Corporate Tax under the NCIT considered as special corporations
 MCIT paid in the previous taxable
quarter(s) Domestic Special Corporations
- Subject to a special rate of income tax based on
EXAMPLE: their TAXABLE INCOME
 10% - Jan 01, 1998 to June 30, 2020
 1% - July 01, 2020 to June 30, 2023
 10% - July 01, 2023 onwards
- However, if the gross income from the
UNRELATED trade, business or other activity
EXCEEDS 50% of the total or gross income
derived from all sources, they shall be treated as
Regular or Ordinary Corporations.
- Optional Treatment of Capital Outlays
 At its option, may elect either:
Quarter 1 Quarter 2 Quarter 3  Outright Expense
TD 150,000 495,000 705,000  Capitalized and Depreciate
CWT 30,000 75,000 135,000
PY 15,000 15,000 15,000 EXAMPLE:
 - SK to US = 12 hrs.
GPB = 20,000 * 3/15 = 4,000

EXAMPLE:

GS 6,500,000
AD 2,300,000 Unrelated income did exceed
NTI 4,200,000 50% of the GI
x 1%
TD 42,000 = TP
GR – M to I 12,000,000
GR – M to G 6,000,000
GR – M to E 3,750,000 (5,000,000 * 9/12)
GI 21,750,000
x 2.5%
Tax 543,750

Foreign Special Corporations Part 2

- Regional Operating Headquarters
 10% until 2021 based on their Net Taxable
Income
 25% effective Jan 01, 2022 and shall be
GS 30,000,000 subject to NCIT or MCIT. They are now
Unrelated income exceeded 50%
AD 12,000,000 considered as RFC and a Regular
of the GI
NTI 18,000,000 Corporation.
x 25%  These are multinational companies with
TD 4,500,000 operations worldwide and they have
TC 150,000 established an office here in the PH wherein
TP 4,350,000 they can operate and sell their goods.
Therefore, if they sell their goods, they
Foreign Special Corporations Part 1 generate income that is subject to 10% tax.
- International Carrier - Branch Remittances
 Subject to 2.5% based on Gross Philippine  Any profit remitted by a branch to its head
Billings office shall be subject to a tax of 15% which
 GROSS PH BILLINGS refers to the amount shall be based on the Total Profits applied or
of gross income derived from carriage of earmarked for remittance without any
persons, excess baggage, cargo, and mail deduction for the tax component.
originating from the Philippines in a - Owner, Lessor or Distributor of Cinematographic
continuous and uninterrupted flight, Film
irrespective of the place of sale or issue and  25% of its gross income from all sources
place of payment of the ticket. within Philippines
 Income of international carrier doing - Nonresident Lessor/Owner of Machinery,
business in the Philippines other than those Equipment, Aircraft
classified as Gross PH Billing may be subject  7.5% of Gross Rentals or Fees
to 25% income tax. - Nonresident Lessor/Owner of Vessels Chartered
by Philippine Nationals
Paid one ticket cost of 20,000 for PH to SK to US
- PH to SK = 3 hrs.
  4.5% Gross Rentals, Lease or Charter Fees Add: Other Income subject to Basic Tax
from the leases or charters by Filipino Total Net Distributable Income
Citizens or Corporations
OSD = optional standard deduction
END OF TAX ON CORPORATIONS NOTE:
- TNDI will be distributed to the partners
TAX ON PARTNERSHIPS, ESTATES AND TRUSTS depending on their profit-sharing agreement.
Two Forms of Partnerships: - The GPP is not taxable but the partners will be
1. Business Partnership (BP) reporting or are taxable
 Taxable on business income - When you compute for the NDI of the GPP, the
2. General Professional Partnership (GPP) GPP is also treated as a corporation. Therefore,
 Taxable individually the rules on OSD for corporation will apply to the
GPP for the computation of the NDI of the GPP.
- 10% Creditable Withholding Income is deducted
from the TNDI before distributed to the partners.
Tax Treatment:  For example, the TNDI is 100,000 and the
a. BP – Corporation sharing is 25% per partner. Partner A will
b. GPP – Exempt Entity because it is just now receive 22,500 instead of 25,000.
considered as “Pass-thru entity” (agi-anan rana  25,000 will still be reported as Partner A’s GI
siya). GPP is not taxable but the professionals, but the 2,500 will be reported or deducted as
owners, or the partners. Tax Credit.
Partners:
a. BP – Stockholders What will the partners do?
b. GPP – Professionals Gross Income from other sources
Less: Allowable Deductions
Income Distribution: Net Taxable Income
a. BP – Dividends, subject to 10% Final Taxes; not
included in the Gross Income. Gross Income from GPP
b. GPP – Professional Income, subject to Basic Less: Allowable Deductions (If GPP used Itemized)
Taxes, and to 10% Creditable Withholding Tax Net Taxable Income – GPP
 The portion that they receive from the GPP is
part of their GPP. Add: Compensation Income (If there is/are)
 The 10% Creditable Withholding Tax is part Total Net Taxable Income – Partner
of the Tax Credit that can claimed by the
professionals. Can the partners still allowable deductions from the
 The GPP will take care of the VAT and portion or income that s/he received from the GPP?
Percentage Tax in behalf of the partners but - Yes, if the GPP used itemized deductions, the
income tax GPP is exempted. So, the partners can still deduct items against his/her
partners are needed to pay for the Business share provided that expenses is (1) related to the
Tax because it is already taken cared of by practice of his/her profession; and, (2) not yet
GPP. claimed by the GPP.
- No, if the GPP used Optional Standard
Can the partners receive salary from the partnership? Deductions or OSD. OSD is a representative or
- Yes. The salary by partners, whether BP or GPP, already represents all the available or allowable
is treated as an ordinary income which is to deductions against that certain income.
subject to basic taxes.  Therefore, we assumed that if the
partnership used OSD, it is assumed that the
General Professional Partnership partnership has already deducted all the
Gross Income possible expenses against its income.
Less: Allowable Deductions (Itemized Deduction or OSD)  Thus, the income received by the partner
Net Distributable Income from the GPP is already net of available or
allowable deductions.
  Therefore, if the partners used OSD, then in A Net Share
the partner’s report s/he cannot claim any 896,000 – 10%
deductions anymore. = 806,400
B Net Share
Business Partnership 1,344,000 – 10%
Gross Income = 1,209,600
Less: Allowable Deductions
Net Taxable Income 2. GI 2,000,000
Less: Tax (25% or 20%) D 800,000
Net Distributable Income OI 300,000
Add: Other Income subject to Final Taxes, net NTI 1,500,000
Total Net Distributable Income
TD = TP
NOTE: = 340,000
- TNDI will be distributed to the partners
depending on their profit-sharing agreement. 3. GI 3,000,000
- Whatever the partners receive, such are subject D 1,100,000
to 10% Final Tax considered as a dividend OI 200,000
payment. Therefore, when the partners prepare NTI 2,100,000
their own Income Tax Returns (ITR) that will not
be included anymore because that is already TD = TP
been subjected to Final Taxes. = 522,000
- If the partners have other income/s aside from
the BP, these incomes will only be paid by the b. General Professional Partnership
partners or be reported in their ITR not including 1. 56:40
what s/he received from the BP.

Example:
A and B are partners who provided the following data
about their partnership and their own data in their
separate businesses:

Partnership A B
GI 4,000,000 2,000,000 3,000,000
Deductions 1,200,000 800,000 1,100,000
P&L Ratio 4:6
Drawing 500,000 300,000 200,000
Account
Other 300,000 200,000
Income

Compute for the Tax Payable of (1) Partnership, (2) A,

and (3) B, assuming the partnership is (a) BP, and (b)
GPP.
a. Business Partnership
1. GI 4,000,000 NTI < 5M; there is no mention
D 1,200,000 of asset so it is safely
NTI 2,800,000 assumed to be qualified.
x 20%
TD 560,000 = Tax Payable
A share, 40% = 896,000
NDI 2,240,000
B share, 60% = 1,344,000