Income Tax | National Internal Revenue Code of 1997 (NIRC), as amended by R.A. No.… | TAXATION LAW

The National Internal Revenue Code of 1997 (NIRC), as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law and the Ease of Paying Taxes Act, covers the structure and requirements of income tax in the Philippines. Here is a meticulous and detailed breakdown of the topic.

I. Overview of Income Tax in the Philippines

Income tax is a tax levied on the income of individuals and corporations, as prescribed by the NIRC, along with specific amendments introduced by the TRAIN Law (Republic Act No. 10963) and further adjustments under the Ease of Paying Taxes Act (Republic Act No. 11976). The income tax system is progressive, with different rates applicable to various levels of taxable income, aiming to generate revenue equitably based on taxpayers' ability to pay.

II. Amendments under the TRAIN Law (R.A. No. 10963)

The TRAIN Law introduced substantial reforms to income taxation, which came into effect on January 1, 2018. Key areas amended include:

  1. Personal Income Tax for Individuals

    • Income Tax Rates: The TRAIN Law adjusted the income tax rates for individuals. It introduced a progressive rate schedule where lower-income individuals pay significantly reduced rates or are exempted, while higher-income individuals face steeper rates.
    • Tax Brackets:
      • Exemptions: Annual taxable income of up to PHP 250,000 is exempt from income tax.
      • Rates: For annual incomes above PHP 250,000, rates range from 20% to 35%, with the highest rate applying to income exceeding PHP 8 million.
    • Taxable Income Calculation: Gross income includes compensation, business income, and other income sources, minus allowable deductions to determine taxable income.
    • Allowable Deductions: These include personal exemptions, additional exemptions for dependents (now limited under the TRAIN Law), and other deductions for specific purposes.

  2. Taxation on Passive Income and Other Forms of Income

    • Interest Income from Deposits: Interest on Philippine peso deposit accounts and other fixed-income investments is subject to a final withholding tax of 20%.
    • Dividend Income: Dividends received from domestic corporations are taxed at 10%.
    • Capital Gains Tax: The tax on the sale of domestic shares not traded on the stock exchange is 15%.
    • Income from Self-Employment and Business: Individuals earning below PHP 3 million annually may opt for an 8% tax on gross sales or receipts instead of the graduated income tax and percentage tax.

  3. Corporate Income Tax

    • The corporate income tax rate was gradually reduced under the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act to a current rate of 20% for domestic corporations with taxable income below PHP 5 million and total assets not exceeding PHP 100 million, and 25% for other domestic and resident foreign corporations.

  4. Withholding Tax System

    • The TRAIN Law mandates that employers withhold tax on employee compensation, simplifying the collection of taxes from employees. Additionally, withholding taxes apply to various payments to suppliers and contractors, which are remitted directly to the Bureau of Internal Revenue (BIR).

  5. Estate and Donor’s Tax

    • The TRAIN Law simplified estate and donor’s tax by introducing a flat rate of 6%, removing the previous graduated tax schedules.

III. Ease of Paying Taxes Act (R.A. No. 11976)

The Ease of Paying Taxes Act, signed into law in 2023, primarily aimed to simplify tax compliance and improve the efficiency of tax administration in the Philippines. Notable changes include:

  1. Taxpayer Segmentation

    • The BIR introduced segmentation to tailor tax compliance requirements according to the taxpayer’s profile, including classifications for small, medium, and large taxpayers.
    • Small taxpayers are subject to simplified procedures, while large taxpayers maintain the obligation of strict compliance and reporting standards.

  2. Digitalization of Tax Services

    • The Act mandates the expansion of digital platforms for filing and paying taxes, allowing taxpayers to complete transactions online. This reduces manual processing time and the need for physical BIR visits.
    • The law encourages electronic invoicing and record-keeping systems for easier compliance and reporting.

  3. Simplified Compliance Procedures

    • The law introduced streamlined forms and reduced paperwork, with fewer reporting requirements for individual taxpayers and small enterprises.
    • The BIR now provides a simplified tax filing system, allowing taxpayers to report gross sales, income, and deductible expenses more efficiently.

  4. Single-Payment System for Taxes

    • The Act allows for a single-payment option for self-employed individuals and businesses with incomes below PHP 3 million, where they may opt to pay a final income tax of 8% on gross sales or receipts, which covers both income tax and percentage tax liabilities.

  5. Improved Appeal Process for Tax Disputes

    • The Act strengthens taxpayer rights, providing clear guidelines on the appeal process for tax assessments and disputes. A streamlined dispute resolution process improves transparency and protects taxpayer interests in BIR examinations and audits.

IV. Specific Provisions on Income Taxation for Individuals and Corporations

  1. Individual Income Taxation

    • Includes compensation income, income from self-employment or business, passive income, and other income. Taxpayers must report all sources of income and are liable to pay income tax on total taxable income.
    • The TRAIN Law and Ease of Paying Taxes Act emphasize exemptions, rate adjustments, and streamlined procedures, particularly benefiting low- to middle-income earners.

  2. Corporate Income Taxation

    • Domestic and foreign corporations are subject to income tax on income derived within the Philippines.
    • CREATE Act provisions for small enterprises provide reduced rates, encouraging economic recovery and investment in the Philippines.

  3. Tax on Passive Income and Capital Gains

    • Individuals are subject to final withholding taxes on passive income like interest and dividends, and capital gains tax applies to the sale of capital assets.
    • The tax structure incentivizes reinvestment while discouraging short-term speculative trading through capital gains tax rates.

V. BIR’s Role and Powers under the NIRC and Amendments

  1. Assessment and Collection of Taxes

    • The BIR is responsible for assessing and collecting taxes due from taxpayers, based on filed tax returns or through audits.
    • The Bureau is empowered to enforce compliance, including imposing penalties and interest on late or deficient payments.

  2. Examination of Returns and Audits

    • The BIR is authorized to examine tax returns and audit taxpayers to verify the accuracy of reported income and claimed deductions.
    • Taxpayers may appeal audit findings through established BIR or judicial processes under tax appeal mechanisms introduced by the Ease of Paying Taxes Act.

  3. Imposition of Penalties and Interest

    • Non-compliance, such as late filing or underreporting income, attracts penalties and interest.
    • The Act also provides for penalties on fraudulent tax claims or misstatements in returns.

  4. Powers to Amend Rules and Regulations

    • The BIR Commissioner, under the NIRC, has the authority to issue regulations necessary to enforce tax laws. This includes adapting rules to align with changes made under the TRAIN Law and the Ease of Paying Taxes Act.

VI. Summary of Key Taxpayer Obligations and Compliance under Current Law

  1. Filing of Annual Income Tax Returns

    • All individual and corporate taxpayers must file an annual income tax return unless specifically exempted.
    • Deadlines are typically on or before April 15th of the succeeding year for individuals and corporations with a calendar year accounting period.

  2. Quarterly Payment of Estimated Taxes

    • Taxpayers must pay quarterly income taxes based on estimated income for the period. Final adjustments are made with the annual return.

  3. Obligation to Keep Records

    • The law requires taxpayers to maintain records supporting income, deductions, and tax payments for future audits.

  4. Obligation to Withhold Taxes

    • Employers and payors must withhold taxes on compensation, business payments, and passive income, remitting these amounts to the BIR on behalf of taxpayers.

This comprehensive analysis of the NIRC, as amended by the TRAIN Law and the Ease of Paying Taxes Act, captures essential aspects of income tax laws in the Philippines.

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