INDIVIDUAL INCOME TAXATION

I. TAXABLE INDIVIDUALS

A. Resident Citizen (RC)

Section 1, Article IV, 1987 Constitution: The following are citizens of the Philippines -
1. Those who are citizens of the Philippines at the time of the adoption of this Constitution;
2. Those who fathers or mothers are citizens of the Philippines;
3. Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority; and
4. Those who are naturalized in accordance with law.

You are considered as a resident of the Philippines if during the taxable year, you are domiciled in the Philippines. If you fall under the
definition of “Citizen” under the Constitution and if for the majority of the taxable year you are staying here in the Philippines, then you
can be considered as RC. Thus, you are taxable for your income both within and without.

 Income Within and Without (5% to 32% based on Net Income)

B. Non-resident Citizen (NRC)

Section 22(E), NIRC:

1. A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a
definite intention to reside therein.
2. A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis.
3. A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically
present abroad most of the time during the taxable year.
4. 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.
5. The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad
or to return to and reside in the Philippines as the case may be for purpose of this Section.

NOTE: A Filipino employed as a Philippine Embassy/Consulate service personnel of the Philippine Embassy/Consulate is not treated as a
non-resident alien, hence his income is taxable.

 Income Within (5% to 32% based on Net Income)

Take note of the word “immigrant.” It means to say that you have decided to settle in that foreign country for good. On the other hand,
when you say “employment on a permanent basis,” it is not contractual but on a regular basis. Thus, seafarers in a vessel for
international transport do not fall under this classification because their employment is not on a permanent basis but rather on a
contractual basis. He may be considered as a NRC not under the second classification but under the third classification. When you say
“most of the time,” it does not mean it is permanent.

What is meant by the phrase “most of the time”? It means majority of the taxable year (i.e., 183 days or more). Meaning to say, if you
stayed abroad for 183 days or more, you can be classified as NRC. If you stayed in the Philippines for 183 days or more, you can be
classified as RC.

In the counting of the 183 days, we still follow the usual rule under the Civil Code. If the specific year and the specific name of the
month is indicated, then you will have to count the number of days per month (i.e., 28, 30 or 31). But if there is no indication of the
specific year and month, then more or less six months or more than six months.

Take note that it is 183 days or more AND NOT more than 183 days. Stated otherwise, at least 183 days.

Examples: Mr. X, a Filipino Citizen, for -

 Year 2012:
 January 1 to July 31 – Philippines
 July 31 – Flight to HK
 July 31 to December 31 – HK
 RC (classification for the entire taxable year) because his stay abroad is less than 183 days

 Year 2013:
 January 1 to December 31 – Philippines
 NRC (classification for the entire taxable year) because he stays abroad for the entire taxable year

 Year 2014:
 January 1 to May 31 – HK
 May 31 – arrival in the Philippines
 May 31 to December 31 – Philippines
 Apply Section 22(E)(4) – hybrid classification
 NRC (taxable within) from January 1 to May 31
 RC (taxable within and without) from May 31 to December 31
 When you are a returning citizen, previously classified as NRC, and you want to permanently reside here in the Philippines,
during the taxable year when you return, a portion of your income earned abroad you will be treated as NRC; while, the rest of
your income earned in the Philippines, you will be considered as RC.
 Question: What if he arrived in the Philippines on December 30? His classification will not be hybrid but he will be classified as NRC
since he stayed abroad was for 183 days or more.

 Year 2014:
 January 1 to August – HK
 August – return to the Philippines
 NRC (automatic, since he stayed abroad for at least 183 days)
 Do not apply Section 22(E)(4) but rather apply Section 22(E)(3)

NOTES:
 Section 22(E)(4) will apply if during the return to the Philippines, he could have been classified already as RC. In other words,
if he stayed abroad for less than 183 days.
 Section 22(E)(3) will apply if he stayed abroad most of the time or if his stay abroad is at least 183 days.

 Year 2013:
 If instead of staying in HK for the entire year, Mr. X returned to the Philippines in February
 RC (classification for the entire taxable year)
 You do not apply the rule under Section 22(E)(4) since he was not previously considered as NRC but rather as RC (refer to the
first example).

The counting of the 183 days is either continuous or aggregate (during the applicable taxable year).

C. Resident Alien (RA)

Section 22(F), NIRC: A resident alien is an individual whose residence is within the Philippines and who is not a citizen thereof.

 Income Within (5% to 32% based on Net Income)

When can you say that you a resident alien? If you have a definite purpose of staying here in the Philippines and you are not yet a citizen
of Philippines.

It is important to distinguish RA from NRA because although they are both taxed for income within the Philippines, they differ on the
exemptions. The NRA do not have the same exemptions with the RA.

Some indicators that a person can be classified as RA:

 Staying in the Philippines with a definite purpose (e.g., employment, business, education, if you are married to a Filipino)
 Staying in the Philippines for one year or more (take note that this was used in one case and by some authors; however, this is not
a safe guideline and should not be the only factor to be considered in determining classification)
 Tourist visa converted to another visa (i.e., 13-A or 13-G depending on whether you are employed or married to a Filipino)

If a foreigner is staying here in the Philippines for recreation and without a definite purpose, even if he has stayed for more than one
year, he will still be classified as NRA.

D. Non-resident Alien (NRA)

1. Non-resident Alien Engaged in Trade and Business (NRA-ETB)

Section 25(A)(1): A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more
than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the
Philippines', Section 22 (G) of this Code notwithstanding.

 Income Within (5% to 32% based on Net Income)

Take note that it is more than 180 days OR at least 181 days. Since an NRA has no definite purpose, there is a need to determine
the number of days he has been staying in the Philippines to verify if he can be classified as NRA-ETB. Unless he can prove that he
has a definite purpose in extending his stay in the Philippines, then that is the time you classify him as RA; however, that is not
automatic (i.e., documents should be submitted for support).

2. Non-resident Alien Not Engaged in Trade and Business (NRA-NETB)

If your stay in the Philippines is 180 days or less and without a definite purpose, then you are classified as NRA-NETB.

 Income Within (25% based on Gross Income)

E. Special Employees

Employed by Special Corporations: Alien individuals employed as managers, supervisors or technical employees by special corporations -

1. Regional Area Headquarters (RAHQ) of multinational corporations

Section 22(DD), NIRC: The term "regional or area headquarters" shall mean a branch established in the Philippines by multinational
companies and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications
and coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets.

 used for supervision and to oversee the operations; it does not have its own income as it does not have its own operations
 2. Regional Operating Headquarters (ROHQ) of multinational corporations

Section 22(EE), NIRC: The term "regional operating headquarters" shall mean a branch established in the Philippines by
multinational companies which are engaged in any of the following services: general administration and planning; business planning
and coordination; sourcing and procurement of raw materials and components; corporate finance advisory services; marketing
control and sales promotion; training and personnel management; logistic services; research and development services and product
development; technical support and maintenance; data processing and communications; and business development.

 has its own operations here in the Philippines and generates its own income

3. Offshore banking units (OBU)

 Examples: CitiBank, Standard Chartered Bank, Allied Bank

4. Petroleum service contractors

 Examples: Chevron, Caltex

On the gross income in the Philippines of Aliens Employed by Regional Headquarters (RHQ) or Area Headquarters and
15%
Regional Operation Headquarters (ROH), Offshore Banking Units, Petroleum Service Contractor and Subcontractor

NOTE: Filipinos can avail of the 15% special tax rate if:
 They are employed in a position that is managerial AND technical; and
 They can prove that no other foreign nationals qualify for such a position.

Why are these employees considered as special employees? Aside from being subjected to a special tax rate of 15%, they are required to
undergo a special registration with the SEC.

F. Estates and Trusts

 Estate: pertains to the properties of a deceased individual pending distribution to the heirs
 Trust: pertains to the trusts in the bank wherein you have assets kept by the fiduciary for the benefit of the beneficiary (but
nevertheless, it is considered as assets of the deceased)

Example: Mr. Dico died on December 31, 2014 –

 His estate is subject to Estate Tax.
 The income earned by the estate will be subjected to income tax.
 In the ITR, the estate will be the taxpayer but filed by the administrator (intestate) or executor (testate).
 The estate is given a personal exemption of 20,000 with no additional exemption (reason: when the amount of personal exemption
was increased to 50,000 in RA 9504, the provision for estates and trusts was not included)

II. INCOME TAX RATES

For Individuals Earning Purely Compensation Income and Individuals Engaged in Business and Practice of Profession

Amount of Net Taxable Income Rate

Over But Not Over
10,000 5%
10,000 30,000 P500 + 10% of the Excess over 10,000
30,000 70,000 P2,500 + 15% of the Excess over 30,000
70,000 140,000 P8,500 + 20% of the Excess over 70,000
140,000 250,000 P22,500 + 25% of the Excess over 140,000
250,000 500,000 P50,000 + 30% of the Excess over 250,000
500,000 P125,000 + 32% of the Excess over 500,000 in 2000 and onward

If your income is below 10,000, you will not be subjected to tax. But it does not necessarily mean that you don’t have to file your ITR. Even if
you do not have a tax payable, especially if you have your business or you are practicing your profession, you still need to file ITR and just
indicate there that you earn income below 10,000.

NOTE: When the tax due exceeds P2,000.00, the taxpayer may elect to pay in two equal installments, the first installment to be paid at the
time the return is filed and the second installment on or before July 15 following the close of the calendar year with the Authorized Agent
Bank (AAB) within the jurisdiction of the Revenue District Office (RDO) where the taxpayer is registered. [Section 56(A)(1), NIRC]

Deadline of filing ITR for Individual taxpayers: 15th day of the fourth month following the taxable year. Thus, if your taxable year is 2014, the
deadline of filing your ITR is on April 15, 2015.