Week 4 Course Material For Income Taxation

Subject Code: BAINCTAX
Subject Title: Income Taxation
Topic: Module 4: Income Tax on Individuals – Passive Income & Capital Gains
a. Passive income subject to final withholding tax
b. Capital gains tax
c. Income tax returns
d. Married individuals
e. Special aliens
f. Allowable deductions from income of individual taxpayers
MODULE 4:
INCOME TAX ON INDIVIDUALS – PASSIVE INCOME & CAPITAL GAINS
I. Pre-test / Activity
1. Which of the following income is required to be filed in a quarterly income tax return?
A. compensation income
B. passive income
C. business income
D. capital gains
2. Which of the following is an income subject to the graduated tax rates?

A. Prizes from USA lotto
B. Dividends received from domestic corporation
C. Share in the net income of ordinary partnership
D. Interest income from BDO
II. Learning Outcomes

At the end of the topic the students should be able to:
 Describe the nature of final income tax on certain passive income
 List the passive income subject to final tax
 Identify the final tax rates for different income types
 Explain the rules on classifying assets
 Compute for the capital gains tax on sale of real properties
 Compute for the capital gains tax on sale of domestic shares directly to buyer
 Identify the required forms to be filed and their deadlines
SM Baliwag Complex, Dona Remedios Trinidad Highway, Brgy. Pagala, Baliwag, Bulacan
(+63) 927-533-0342 – (+63) 923-949-5265 admissions-nubaliwag@nu.edu.ph
III. Content
A. PASSIVE INCOME SUBJECT TO FINAL WITHHOLDING TAX
Passive incomes subject to final withholding taxes (FWT) are certain passive income from
sources within the Philippines. These passive income are not subject to graduated tax rate but to
specific final withholding tax rates.
Nature of final income tax on certain passive income

1. Final tax applies only on the items of passive income that are expressly listed by the NIRC
2. Final taxes are withheld at source by the payor. The income received by the payee
(taxpayer) is net of the tax which is deemed final. The income taxpayer need not file a tax
return to report the income.
3. Withholding of final taxes applies only to payors or withholding agents in the Philippines.
Passive income subject to final tax

1. Interest income
2. Dividend income
3. Winnings
4. Royalty
5. Prizes
6. Informer's reward
7. Fringe benefits
Deposit substitutes
(Tax treatment of interest income derived from government debt instruments and securities)
RR 14-2012 defines "deposit substitute" as an alternative form of obtaining funds from the public
other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the
borrower's own account, for the purpose of re-lending or purchasing of receivables and other
obligations, or financing their own needs or the needs of their agent or dealer.
"Public" is defined as borrowing from twenty (20) or more individual or corporate lenders at any
one time. The mere issuance of government debt instruments or securities is deemed as falling
within the coverage of deposit substitutes irrespective of the number of lenders at the time of
origination, and therefore interest income derived therefrom shall be subject to applicable final
tax rate. Government debt instruments and securities including Bureau of Treasury issued
instruments and securities such as Treasury bonds (T-bonds), Treasury bills (T-bills) and
Treasury notes are classified as deposit substitutes if such instruments or securities are to be
traded or exchanged in the secondary market.
Interest income from long-term deposit or investment certificates

(Evidenced by certificates prescribed by BSP (Based on RR 14-2012, RMC 7-2015)
Long-term deposit or investment certificate refers to certificate of time deposit or investment in
the form of savings, common or individual trust funds, deposit substitutes, investment
management accounts and other investments with a maturity period of not less than five (5) years,
the form of which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) and issued by
banks only to individuals (should not be under the name of a corporation or a bank or a trust
department of a bank) in denominations of ₱10,000 and other denominations as prescribed by
BSP (RR 14-2012).
Table 1 Passive income: Final tax (RA 10963 & RA 11534)
From sources within the Philippines, Resident Non- Resident Non- Non-
on passive income of: Citizen resident Alien resident resident
Citizen Alien (ETB) Alien
(NETB)
a. Interest under the expanded 15% Exempt 15% Exempt Exempt
foreign currency deposit system
b. Royalty from books, literary 10% 10% 10% 10%
works and musical compositions
c. Dividend from a domestic 10% 10% 10% 20%
corporation, or from a joint stock
company, and insurance or
mutual fund company, and
regional operating headquarters
of multinational company, or
share in the distributive net
income after tax of a partnership
(except a general professional
partnership), joint or joint 25%
venture or consortium taxable as
a corporation
d. Interest on any currency bank 20% 20% 20% 20%
deposit, yield or other monetary
benefits from deposit substitute,
trust fund and similar
arrangement; royalty other than
(b) above; Prizes* exceeding
₱10,000 and other winnings**,
Philippine Charity Sweepstakes
Office and lotto winnings
exceeding ₱10,000
e. Interest on long-term deposit or Exempt Exempt Exempt Exempt
investment in banks (with
maturity of 5 years or more)***
*Prize is the result of an effort (e.g. prize in a beauty contest).
Prizes amounting to ₱10,000 or less shall be subject to tax under (tax table 0% to 35% ITR)
**Winning is the result of a transaction where the outcome depends upon chance (e.g. betting).
Other winnings regardless of amount subject to Final Tax (refer to letter d above)
PCSO and Lotto amounting to ₱10,000 or less is exempt from income tax
***Upon pre-termination before the fifth year, there should be imposed on the entire income from
the proceeds of the long-term deposit based on the remaining maturity thereof:
Holding Period
Four (4) years to less than five (5) years - 5%
Three (3) years to less than four (4) years - 12%
Less than three (3) years - 20%
Exempt Prizes
1. Prizes and award made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary or civic achievement. Provided:
a. The individual was selected without any action on his part to enter the contest or
proceeding; and
b. He/she is not required to render substantial future services as a condition to receive
the prize/award.
2. All prizes and awards granted to athletes in local and international sports competition and
tournaments, whether held in the Philippines or abroad and sanctioned by their respective
national sports association.
Informer's Reward
Reward given to persons instrumental to the discovery of violations of the Tax Code and in the
discovery and seizure of smuggled goods is entitled to 10% of the revenues, surcharges or fees
recovered and/or fine or penalty imposed and collected or ₱1,000,000 per case, whichever is
lower.
Excluded from the entitlement to the reward are internal revenue officials or employees, other
public officials or employees or relatives thereof within the 6th degree of consanguinity. The
informer's reward shall be subject to 10% FWT.
Illustration 1
Mr. Tan received the following gross interest income:
Interest from Peso deposits – BPI Philippines.……………………. ₱40,000
Interest from Foreign currency deposits – Metrobank Philippines... 42,500
Interest from Peso deposits – Bank in Canada……………………. 120,000
Interest from foreign currency deposits – Bank in US…………….. 60,000
Interest from Treasury bonds………………………………………. 30,000
Interest from client's promissory notes…………………………….. 10,000
Interest from lending to friends……………………………………. 50,000
Required: Compute the following the final tax assuming Mr. Tan is a:
a. Resident citizen
b. Non-resident citizen
Illustration 2
A resident citizen taxpayer provided the following information:
Interest income – BDO Philippines………………………………………. ₱100,000
Interest income – BDO in Hong Kong…………………………………… 50,000
Dividend income from a domestic corporation…………………………… 125,000
Dividend income from a resident foreign corporation……………………. 75,000
Dividend income from a nonresident foreign corporation……………….. 102,000
Interest income received from UnionBank under FCDS, Philippines……. 50,000
Philippine lotto winnings…………………………………………………. 10,000
Philippine Charity Sweepstakes winnings……………………………….. 500,000
Hong Kong lotto winnings………………………………………………. 200,000
Other winnings – Philippines…………………………………………….. 50,000
Prizes – Robinsons Malolos……………………………………………… 8,000
Prizes – SM City Baliwag………………………………………………… 20,000
Prizes – SM City China…………………………………………………… 30,000
Required: Compute the following the final tax on passive income.
B. CAPITAL GAINS TAX

Ordinary asset vs. Capital asset
For taxation purposes, assets are classified either as ordinary or capital assets. Under Section 39
of the Tax Code, as amended, the following are ordinary assets:
1. Stock in trade of the taxpayer or other property of a kind which would properly be included
in the inventory of the taxpayer if on hand at the close of taxable year.
2. Property used in trade or business subject to depreciation.
3. Real property held by the taxpayer primarily for sale to customers in the ordinary course
of trade or business.
4. Real property used in trade or business of the taxpayer.
Capital assets include all other property held by the taxpayer (whether or not connected with his
trade or business) not included in the definition of ordinary assets above. Generally, assets not
used or held for sale in the ordinary course of business (i.e., personal assets) are classified as
capital assets.
Classification of an asset, either as capital or ordinary is important because of the special tax rules
on gains and losses from sale or exchanges of capital assets which do not apply to gains and losses
from sale or exchanges of ordinary assets.
Gain on sale of ordinary assets are commonly known as ordinary or regular income that are subject
to basic income tax or graduated tax rate as provided for under Section 124(A) of the Tax Code.
On the other hand, gain on sale of capital assets are classified as capital gains subject to the
following taxes:
Capital Gains Tax (CGT) if pertaining to the following:

1. Sale of shares of stock of a Domestic Corporation not listed and traded through a local
stock exchange
a. Capital Gains Tax does not apply if the sale of shares of stock was made by
i. A dealer in securities
ii. Investor in shares of stock in a mutual fund company; and
iii. Other persons exempt under special law. (Sec. 4 of RR No. 6-2008)
b. Tax base: Net capital gain, which is the excess of the selling price/fair market value
(less cost to sell) over the cost of the shares
c. Capital gain tax rate: 15%
Selling Price……………….. ₱xx

Less: Cost………………….. (xx)
Capital Gain……………….. xx
Rate………………………… 15%
Capital gain tax…………… xx
Note:
a. Sale of shares of stock of a domestic corporation through the local stock exchange is
not subject to income tax but to a "business tax of 6/10 of 1% (also known as Stock
Transaction Tax) under Sec. 127 of the Tax Code.
b. Sale of shares of stock by a dealer in securities such as brokerage firms, regardless
of whether the shares were sold directly to a buyer or through the local stock
exchange is subject to regular income tax and value added tax.
2. Sale of real properties classified as capital asset located in the Philippines

a. Tax base: Selling price or fair market value (FMV) whichever is higher. FMV of real
property shall be higher between:
i. Fair market value as provided by City or Provincial assessors (also known as
assessed value or FMV for real property tax declaration purposes); and
ii. Zonal value as provided by the Commissioner of Internal Revenue (CIR).
b. Capital gain tax rate: 6%
Selling Price or FMV whichever is higher… ₱xx

Rate………………………………………… 6%
Capital gain tax…………………………… xx
Sale of Real Property to the Government
If a real property classified as capital asset located in the Philippines is sold to the government or
any of its political subdivisions or agencies or to government owned or controlled corporations
(GOCCS), the individual taxpayer shall have the option to be taxed at 6% CGT or regular income
tax using the graduated tax rate.
Table 2 Summary of capital gains subject to CGT

Resident Non- Resident Non- Non-
Citizen resident Alien resident resident
Citizen Alien (ETB) Alien
(NETB)
a. Sale of shares of stock of a 15% 15% 15% 15% 15%
Domestic Corporation not listed
and traded through a local stock
exchange
b. Sale of real properties located in 6% 6% 6% 6% 6%
the Philippines
Illustration 3
Ramon sold 2,000 shares of a domestic corporation directly to a buyer (Benigno) at ₱360 per
share. The shares were acquired six (6) months ago at ₱210 per share. How much is the capital
gains tax?
Illustration 4
Ramon sold 2,000 shares of a domestic corporation directly to a buyer (Benigno) at ₱200 per
share. The shares were acquired two (2) years ago at ₱210 per share. How much is the capital
gains tax?
Illustration 5
Rica sold her vacant lot for ₱2,000,000. The zonal value of the property is ₱1,900,000 while the
fair market value in the tax declaration amounts to ₱1,820,000. The property was acquired five
(5) years ago at ₱900,000. How much is the capital gains tax?
Illustration 6
Rica sold a parcel of land used in her trading business for ₱2,000,000. The zonal value of the
property is ₱1,900,000 while the fair market value in the tax declaration amounts to ₱1,820,000.
The property was acquired five (5) years ago at ₱900,000. How much is the capital gains tax?
C. INCOME TAX RETURNS
Income Period Filing Date Individual Taxpayer
Tax Return
1700 Annual April 15 of the succeeding year Earning Purely Compensation
Income
1701 Annual April 15 of the succeeding year MIXED Income Earner,
Estates and Trusts
1701A Annual April 15 of the succeeding year PURELY from
Business/Profession (Those
under the graduated income tax rates
with OSD as mode of deduction OR
those who opted to avail of the 8%
flat income tax rate)
1701Q Quarterly Individuals, Estates and Trusts
1st qtr. May 15 of the current year
2nd qtr. August 15 of the current year
3rd qtr. November 15 of the current year
Individuals not required to file income tax returns

1. An individual earning purely compensation income whose taxable income does not exceed
₱250,000
2. An individual whose income tax has been withheld correctly by his employer, provided
that such individual has only one employer for the taxable year
3. An individual whose sole income has been subjected to final withholding tax or who is
exempt from income tax pursuant to the Tax Code and other special laws
4. An individual who is a minimum wage earner
5. Those who are qualified under “substituted filing”. However, substituted filing applies only
if all of the following requirements are present:
a. the employee received purely compensation income (regardless of amount) during
the taxable year;
b. the employee received the income from only one employer in the Philippines during
the taxable year;
c. the amount of tax due from the employee at the end of the year equals the amount of
tax withheld by the employer;
d. the employee’s spouse also complies with all 3 conditions stated above;
e. the employer files the annual information return (BIR Form No. 1604-CF); and
f. the employer issues BIR Form No. 2316 (Oct 2002 ENCS version) to each employee.
Capital Gains Filing Date Capital Asset
Tax Return
1706 Within thirty (30) days following each sale, exchange Real Property
or disposition of real property
In case of installment sale, the return shall be filed
within thirty (30) days following the receipt of the 1st
down payment and within thirty (30) days following
each subsequent installment payment
One return is filed for every transfer document
regardless of the number of each property sold,
exchanged or disposed of
1707 Within thirty (30) days after each cash sale, barter, Shares of Stocks Not
exchange or other disposition of shares of stock not Traded Through the
traded through the local stock exchange Local Stock
In case of installment sale, the return shall be filed Exchange
within thirty (30) days following the receipt of the
first down payment and within (30) days following
each subsequent installment payment
1707-A For individual taxpayers, this final consolidated Shares of Stock Not
(Annual Capital return is filed on or before April 15 of each year Traded Through the
Gains Tax covering all stock transactions of the preceding Local Stock
Return) taxable year Exchange
Withholding Tax Period Filing Date Withholding Agent (WA)/Payor

Remittance
Return
1601-FQ Quarterly Last day of the Every Withholding Agent (WA)/payor
month following required to deduct and withhold taxes on
the close of the income payments subject to Final
quarter Withholding Taxes
1602Q Quarterly Last day of the All banks, non-bank financial
month following intermediaries, finance corporations,
the close of the investment and trust companies and other
quarter institutions required to withhold final
income tax on interest paid/accrued on
deposit and yield or any other monetary
benefit from deposit substitutes and from
trust fund and similar arrangements.
Paying installments
The Philippines adopts the pay-as-you-file system with regard to income taxes. When the tax due
is in excess of ₱2,000, the individual taxpayer may elect to pay the tax in two equal installments.
The first installment shall be paid at the time the return is filed (on or before 15 April) and the
second installment is paid on or before 15 October following the close of the calendar year.
Illustration 7
A resident citizen of the Philippines had the following non-cumulative data in 2022.
1st Q 2nd Q 3rd Q 4th Q
Gross sales…………………… ₱1,200,000 ₱900,000 ₱900,000 ₱700,000
Cost of goods sold…………… 700,000 500,000 600,000 400,000
Business expense…………….. 200,000 125,000 225,000 150,000
Interest income – Landbank…. 800 400 400 200
Capital gain sale of land…….. 300,000
Selling price: ₱900,000
Cost: ₱600,000
Assessor's FMV ₱800,000
Required:
1. Compute the income tax payable per ITR for the year and each quarter.
2. Compute the final tax on passive income.
3. Compute the capital gain tax.
D. MARRIED INDIVIDUALS
Unless impracticable, a husband and wife must file one consolidated income tax return, but the
tax is computed separately. Income that cannot be definitely attributed or identified as exclusive
income of either spouse is divided equally between them.
E. SPECIAL ALIENS
(Sometimes referred to a Special Aliens and their Filipino Counterparts)
1. Alien Individuals Employed by Regional Headquarters (RHQ) or Area Headquarters and
Regional Operating Headquarters (ROH) of Multinational Companies
2. Alien Individuals Employed by Offshore Banking Units (OBUs)
3. Alien Individuals Employed by Petroleum Service Contractor and Subcontractor
All salaries, wages, annuities, compensation, remuneration and other emoluments, such as
honoraria and allowances received by the following alien individual shall be subject to Graduated
Income Tax Rates (tax table 0% to 35%).
F. ALLOWABLE DEDUCTIONS FROM INCOME OF INDIVIDUAL TAXPAYERS

The deductions allowed shall depend on the nature of income earned by the taxpayer, viz:
1. Compensation income – no deductions are allowed
2. Business/professional – either itemized deductions or optional standard deduction
Optional standard deduction (OSD)
In lieu of itemized deductions, an individual taxpayer (except a nonresident alien) may elect a
standard deduction in an amount not exceeding forty percent (40%) of his gross sales or
receipts, as the case may be. However, the following conditions must be satisfied:
1. That he signified his intention to elect optional standard deduction by checking the
appropriate box in the income tax return filed for the first quarter or the initial quarter of
the taxable year after the commencement of a new business/practice of profession.
2. Once the election is made, it must be consistently applied to all the succeeding quarterly
returns and in the final income tax return for the taxable year.
Because there is no need to list down the deductions made, the law does not require the
attachment of audited financial statements to the income tax return in the case of individuals.
The purpose of optional standard deductions is to facilitate the audit or review of tax returns
because there is no need on the part of the administrative taxing personnel to determine which
items are allowed to be deducted or not.
If the individual is on the accrual basis of accounting for income and deductions, the optional
standard deduction shall be based on the gross sales during the taxable year.
On the other hand, if the individual employs the cash basis of accounting for his income and
deductions, the optional standard deduction shall be based on his gross receipts during the taxable
year.
For other individual taxpayers allowed by law to report their income and deductions under a
different method of accounting (e.g. percentage of completion basis, etc.) other than cash and
accrual method of accounting. The "gross sales" or "gross receipts" shall be determined in
accordance with acceptable method of accounting.
Illustration 8
Jeremiah, a resident citizen of the Philippines had the following income and expenses in 2022:
Income:
Salary from TLC Company………………… ₱210,000
Gross receipts from business……………….. 1,100,000
Cost of sales…………………………………. 450,000
Expenses:
Salaries of employees……………………….. 500,000
Rent of office space…………………………. 24,000
Depreciation of office and store equipment…. 30,000
Taxes and licenses…………………………… 10,000
Bad debts...…………………………………... 7,500
Light and water……………………………… 18,000
Required: Compute the income tax due per ITR assuming Jeremiah availed of:
1. Itemized deduction
2. Optional standard deduction
IV. Activity
Problem 1
Darwin received the following passive income in 2023:
Interest, ₱ deposit – Landbank………………………………….. ₱100,000
Interest, $ deposit – RCBC ($10,000 x P42)…………………… 420,000
Interest, deposit in Hong Kong (HK$10,000 x P5)…………….. 50,000
Prize (TV) won in a local lottery………………………………. 50,000
PCSO winnings………………………………………………… 2,000,000
Prize won in contest in US…………………………………….. 300,000
Lotto winning in US…………………………………………… 100,000
Dividend, domestic company…………………..……………… 600,000
Required: Determine the total final tax in assuming Darwin is:
a. Resident citizen
b. Non-resident citizen
c. Resident alien
d. Non-resident alien engaged in trade
e. Non-resident alien not engaged in trade
Problem 2
Gina sold domestic shares directly to buyer. The following relates to the sale:
Fair market value of shares………………….. ₱400,000
Selling price…………………………………. 300,000
Cost…………………………………………. 150,000
Required: Compute the capital gains tax.
Problem 3
On August 15, 2021, Mr. Mike sold a 500-sqare meter residential house and lot for ₱3,000,000. The
house was acquired in 2006 at ₱2,000,000. The Assessor's fair market values of the house and lot,
respectively, were ₱1,500,000 and ₱1,000,000. The zonal value of the lot was ₱5,000 per square
meter. What is the capital gains tax?
Problem 4
Ben had the following data in 2022:
Income from profession…….………………………………….. ₱450,000
Interest bank deposit (gross of final tax)….…………………… 5,000
Winnings in a raffle…………………………………………… 120,000
Prize won in a contest………….………………………………. 7,000
Dividend received from SM Corp., a domestic corporation…… 3,000
Salary as part-time accounting teacher (net of SSS and other
mandatory contribution and ₱2,400 creditable withholding tax) 17,600
Rental income, net of creditable withholding tax of 5%……… 38,000
Expenses incurred…………..…………………..……………… 60,000
Required: Compute the following:
a. Taxable income per ITR
b. Income tax payable based on the graduated tax rates
c. Final withholding taxes on passive income of Ben

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Subject Code: BAINCTAX

Subject Title: Income Taxation

2. Which of the following is an income subject to the graduated tax rates?

II. Learning Outcomes

Nature of final income tax on certain passive income

Passive income subject to final tax

Interest income from long-term deposit or investment certificates

B. CAPITAL GAINS TAX

Capital Gains Tax (CGT) if pertaining to the following:

Selling Price……………….. ₱xx

2. Sale of real properties classified as capital asset located in the Philippines

Selling Price or FMV whichever is higher… ₱xx

Table 2 Summary of capital gains subject to CGT

Individuals not required to file income tax returns

Withholding Tax Period Filing Date Withholding Agent (WA)/Payor

F. ALLOWABLE DEDUCTIONS FROM INCOME OF INDIVIDUAL TAXPAYERS

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