Philippines Income Tax

• Income tax is a direct tax levied on income from property or occupation.
• The purpose of income tax is to raise revenue for government support.
• Income tax in the Philippines applies to gross or net income realized during the taxable year.
• It is generally imposed on the net income of citizens, resident aliens, domestic corporations, non-resident aliens, and foreign corporations engaged in trade or business within the Philippines.

Special Cases

• Citizens, resident aliens, and non-resident aliens in trade or business may opt for an 8% tax on gross sales/receipts plus other non-operating income, under R.A. No. 10963.
• Final tax applies to certain passive income, cash/property dividends, capital gains from the sale of domestic shares, and real property classified as capital assets.

Characteristics of Philippine Income Tax

• It is a national tax collected by the National Government.
• It is a general tax where revenue can be used for general public purposes.
• It is an excise tax on the privilege to receive or earn income.
• It is a direct tax payable by the person it is imposed on, not shifted to others.
• It is a progressive tax based on the ability to pay, increasing with the tax base.
• The income tax system adopts the citizen, residence, and source principles.
• The system is semi-global or semi-schedular, where certain income types are grouped and taxed at graduated rates, known as the global tax system.

Meaning of Income

• Income is wealth flowing to the taxpayer, not a return of capital.
• It includes gains from the sale or disposition of capital assets, derived from labor, from capital, the sale or exchange of capital assets and is the amount of money coming to a person or corporation within a specified time, whether as compensation for services, interest, or investment profits.

Income vs Capital

• Capital is a fund; income is a flow.
• Capital is Wealth; income is the service of Wealth.
• Return of capital amounts are not income.

Requirements for Income Taxability

• There must be a gain or profit in cash or its equivalent.
• The gain must be realized or received.
• The gain must not be excluded by law or international treaty.

Income Classification by Source

• Income from sources within the Philippines.
• Income from sources outside the Philippines.
• Income from sources partly within and partly without the Philippines.

Types of Taxable Income

• Ordinary Income:
  • Compensation income arises from an employer-employee relationship.
  • Professional income comes from professional services.
  • Business income is obtained from profits in trade or business.
• Passive Income:
  • Earned without action from the taxpayer.
  • Examples include interest income and dividends received by shareholders.
• Capital gains are from selling capital assets.

Persons Subject to Income Tax

• Individuals.
• Corporations.
• Partnerships.
• Estates and Trusts.

Individual Taxpayer Classifications

• Resident Citizen: Taxable on all income from sources within and without the Philippines.
• Non-Resident Citizen: Taxable only on income from sources within the Philippines.
• Resident Alien: Taxable only on income from sources within the Philippines.
• Non-Resident Alien engaged in trade/business: Taxable only on income from sources within the Philippines.
• Non-Resident Alien not engaged in trade/business: Taxable only on income from sources within the Philippines.
• Special Taxpayer: Taxed at 15% gross income.
  • Any Filipino or foreign individual employed in a managerial, supervisory, or rank-and-file position in Offshore Banking Units (OBUs), Regional Area Headquarters, Regional Operating Headquarters of multinational companies, or petroleum contractors/subcontractors.
  • A special taxpayer, generally, shall be taxed at 15% of his total GROSS COMPENSATION INCOME.

Special Taxpayer Exceptions

• Filipino special taxpayers can opt for a 15% final tax or tabular tax if gross compensation income is at least P975,000.
• Aliens are only taxed at 15%.
• All other income is taxed per NIRC provisions.

Corporation Classifications

• Domestic corporations are organized and operated under Philippine laws and are taxable on all income from both within and outside the Philippines.
• Resident corporations are organized under foreign laws but licensed to do business in the Philippines, taxable only on income from sources within the Philippines.
• Non-resident foreign corporations are not engaged in trade or business in the Philippines, and are taxable only on income derived from sources within the Philippines.

Partnership Classifications

• General Co-Partnerships are organized under Philippine Laws, in trade or business, and are taxed like corporations.
• General Professional Partnerships are formed by persons for the purpose of exercising their common profession.

Estates and Trusts

• Estate is all property, rights, and obligations of a deceased person not extinguished by death, including those accrued since the succession opening.
• Trust is an agreement where property title is passed to another for conservation or investment, with income and principal distributed as directed by the creator in the governing document.