INCOME TAXATION (TAXPAYERS AND TAX BASES)

Income Tax is a tax on a person’s income, emoluments, profits arising from property, practice of profession,
conduct of trade or business or on the pertinent items of gross income specified in the Tax Code of 1997 (Tax
Code), as amended, less the deductions if any, authorized for such types of income, by the Tax Code, as
amended, or other special laws.

Different Classifications of Taxpayers

1. Individuals-These are the individual taxpayers with income derived within the territorial jurisdiction of a
taxing authority.
A. Citizen-Under Article IV, Section I of the Philippine Constitution
B. Alien-A foreign-born person who is not qualified to acquire Philippine by birth or after birth.
2. Corporations-It includes the following but not limited to:
A. Partnerships, no matter how created or organized
B. Joint-stock companies
C. Joint accounts
D. Associations
E. Insurance companies

Excludes:

A. General Professional Partnership

B. Joint venture formed for the purpose of construction projects or engaging in petroleum, coal,
geothermal and other energy operations pursuant to an agreement under a service contract with
the Government.
3. Estates-It refers to the mass properties left by a deceased person.
4. Trust-A right to property, whether real or personal, passed to another for conservation or investment to
be distributed in accordance with the directions of the owner.
5. Partnership-A contract whereby two (2) or more persons bind themselves to contribute money,
property, or industry to a common fund to earn profit with the intention of dividing it among themselves.

Types of Taxable Individuals

1. Resident Citizen (RC)-A Filipino Citizen who stayed permanently in the Philippines or stayed outside
the Philippines for less than 183 days during the taxable years.
2. Non-Resident Citizen (NRC)
A. A citizen who is physically present abroad with a definite intention to reside therein.
B. A citizen who leaves the Philippine to reside abroad, either as an immigrant or for employment on a
permanent basis.
C. A citizen who is required by his employment to stay abroad for 183 days or more during the taxable
year.
3. Resident Alien (RA)-A person who is not a citizen of the Philippines but is residing within the
Philippines, including foreign individuals who have stayed in the Philippines for more than one (1) year
from date of arrival.
4. Non-Resident Alien (NRA)-An individual whose residence is not within the Philippines and who is not
a citizen thereof.
A. Non-Resident Alien Engaged in Trade or Business (NRA-ETB)-An individual who comes to the
Philippines and stay therein for an aggregate period of more than 180 days.
B. Non-Resident Alien Not Engaged in Trade or Business (NRA-NETB)-An individual who is not a
citizen nor a resident and his stay does not exceed 180 days during the calendar year.
 5. Special Taxpayers-Those employed by multi-national companies, regional area headquarters,
offshore banking units and petroleum contractors or sub-contractors.

Individual Tax Situs

Taxable on Within the Philippines Within and Without the Philippines

Income:
Non-Resident Citizen Resident Citizen
Resident Alien
Non-Resident Alien-ETB
Non-Resident Alien-NETB

Types of Taxable Corporations

1. Domestic Corporations- A Corporation created or organized under the Philippine laws.

2. Resident Foreign Corporations- Foreign corporations engaged in trade or business within the
Philippines.
3. Non-Resident Foreign Corporations- Foreign corporations not engaged in trade or business within
the Philippines.
4. Special Corporations
A. Domestic Corporations
I. Proprietary Educational Institutions
II. Non-profit hospitals
B. Resident Foreign Corporations
I. International Carriers
II. Offshore Banking Units (OBUs)
III. Regional Operating Headquarters (ROHQs)
c. Non-Resident Foreign Corporations
I. Non-Resident cinematographic film owner, lessor, or distributor
II. Non-Resident owner or lessor of vessels chartered by Philippine Nationals
III. Non-Resident owner or lessor of aircraft, machinery and other equipment

Exempt Corporations

A. Labor, an agricultural or horticultural organization

B. Mutual savings bank
C. A beneficiary society, order or association, operating for the exclusive benefit of the members
D. Cemetery company
E. Non-stock corporation or association
F. Business league chamber of commerce, or board of trade
G. Civil league or organization
H. A non-stock non-profit educational institution
I. Governmental educational institution
J. Farmers’ or other mutual typhoon or fire insurance company
K. Farmers’, fruit growers’ or like association
Corporate Tax Situs

Taxable on Within the Philippines Within and Without the Philippines

Income:
Resident Foreign Corporation Domestic Corporations
Non-Resident Foreign Corporation

Estate and Trusts

Net estate of every decedent, whether resident Shall be subject to an Estate Tax at the rate of six percent
or non-resident of the Philippines (6%)

INDIVIDUAL INCOME TAXATION AND DEALINGS IN PROPERTY

Types of Individual Income Taxes and Taxpayers

Types of Income Kinds of Income Taxes

Ordinary Income-Income from compensation, Regular Income Tax
business, or profession.
Passive Income-Income where there is no Final Tax
active participation on the part of the taxpayer
(e.g. (1)interest on deposit, (2)interest income,
(3)royalty income, (4)dividend income, and
(5)prizes and winnings).
Capital Gains-gains or profits in selling Capital Gains Tax
specific capital assets
-Ordinary assets are assets that are
connected or used in business operations.
-Capital assets include (1) stock and
securities held by taxpayers other than a
dealer in securities, (2)Real and personal
properties not used in trade or business, (3)
investment property

Regular Income Taxation

Compensation Income- These are all remuneration for services performed for an employee for his employer
under an employee-employer relationship.

Gross Receipts- These refer to the total amount of money received by a service provider as income.

Gross Sales- These refer to total sales transactions.

Taxable Income- This refers to pertinent items of gross income less deductions.

Gross Income xxx

Less: Deductions (xxx)
Taxable Income xxx
Progressive Tax Rates %
Tax Due xxx
Less: Tax credit (in case a tax credit is given) (xxx)
Tax still due (in case a tax credit is given) xxx
The Progressive Tax Rates

Annual Income Bracket (in PHP) Tax Rate

Not over 250,000
Over 250,000 but not over 400,000
Over 400,000 but not over 800,000
Over 800,000 but not over 2,000,000
Over 2,000,000 but not over 8,000,000
Over 8,000,000
0%
20% of the excess over 250,000
30,000 + 25% of the excess over 400,000
130,000 + 30% of the excess over 800,000
490,000 + 32% of the excess over 2,000,000
2410,000 + 35% of the excess over 8,000,000

Minimum Wage Earner (MWE) refers to a worker in the private sector who is paid with the statutory minimum
wage (SMW).

Purely Compensation Earner is taxed on the gross compensation income less non-taxable benefits such as
but not limited to the 13th month pay, de minimis benefits, and employee’s share in the SSS, GSIS, PhilHealth,
Pag-IBIG contributions, and union dues.

Husband and wife shall compute their individual tax rate separately based on their respective taxable income.
If any income cannot be attributed or identified as income exclusively, the same shall be divided equally
between the spouses to determine their respective taxable income.

Mixed Income Earners

1. The compensation income shall be subject to the tax rates prescribed by the Tax Code
2. The income from business or practice of profession shall be subject to the following:
A. If the gross sales/receipts and other non-operating income do not exceed the Value-Added Tax
(VAT) threshold, the individual has the option to be taxed at:
I. Graduated income tax
II. Eight percent (8%) income tax rate based on gross sales/receipts and other non-operating
income
B. If the gross sales/receipts and other non-operating income exceeds the Value-Added Tax (VAT)
threshold the individual shall be subject to the graduated income tax rates.

Notes:

A. The option of 8% income tax rate is applicable only to the taxpayer’s income from business.
B. An amount of P250,000 is allowed as deduction under the law for taxpayer’s earning solely from self-
employment/practice of profession and is not applicable for a mixed income earner.

De Minimis and Other Benefits

Benefits Limit of Exemption

Monetized unused vacation leave credits of 10 days
private employees
Monetized value of vacation and sick leave No limit
credits paid to government officials and
employees
Medical cash allowance to dependents of P1500/semester; P250/month
employees
Rice Subsidy P2,000 or one sack of 50 kg. rice/month amounting to not
more than P2,000
Uniform and clothing allowance P6,000/year
Actual medical assistance P10,000/year
Laundry allowance 300/month
Employees achievement award (other than P10,000/year
cash or gift certificate)
Gifts made during Christmas and major P5,000/year
anniversaries
Daily meal allowance for overtime work and 25% of the basic minimum wage on a per region basis
night/graveyard shift
Benefits received under collective bargaining P10,000
agreement and productivity incentives
schemes