Taxability of Income under the National Internal Revenue Code of 1997 (NIRC), as Amended by the TRAIN Law and Ease of Paying Taxes Act

The Philippine taxation system, as codified in the National Internal Revenue Code (NIRC) of 1997 and amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law (R.A. No. 10963) and the Ease of Paying Taxes Act (R.A. No. 11976), imposes taxes on various types of income. The amendments brought by these laws have modernized the tax structure, aimed to simplify compliance, and adjusted tax brackets, especially for individual taxpayers. Below is a meticulous breakdown of the taxability of income under these laws, including classifications, applicable rates, and specific rules for resident and non-resident individuals and corporations.

I. Definition and Scope of Income

The NIRC, following fundamental principles of Philippine tax law, broadly defines income as any gain or profit derived from any source, whether from personal or corporate effort, investments, or business activities. Income can be classified as active or passive, with active income originating from labor or personal service and passive income arising from investments.

Types of Taxable Income

Compensation Income – Income derived from employment services rendered, including salaries, wages, allowances, bonuses, and other benefits.
Business Income – Income generated by sole proprietorships, partnerships, and corporations from business operations.
Professional Income – Fees and earnings derived from the practice of a profession, such as medicine, law, accounting, engineering, and consultancy.
Passive Income – Income that includes interest, dividends, capital gains, royalties, and other forms of investment income.
Other Income – Gains from property, prizes, winnings, and other miscellaneous income not specifically exempt or categorized.

II. Taxability of Income under the NIRC as Amended

The NIRC imposes taxes on all types of income earned or derived by individuals and entities within or outside the Philippines, depending on their residency status.

A. Tax Treatment of Individual Taxpayers

Resident Citizens – Subject to Philippine income tax on all income, whether sourced within or outside the Philippines.
Non-Resident Citizens – Taxed only on income derived from Philippine sources.
Resident Aliens – Taxed on all income earned within the Philippines but not on foreign-sourced income.
Non-Resident Aliens – Classified into two types:
- Engaged in trade or business – Taxed on income derived from Philippine sources at graduated rates.
- Not engaged in trade or business – Taxed at a flat rate of 25% on gross income from Philippine sources.

B. Corporate Taxpayers

Domestic Corporations – Taxed on their worldwide income.
Foreign Corporations – Further classified as:
- Resident Foreign Corporations – Taxed on Philippine-sourced income.
- Non-Resident Foreign Corporations – Subject to tax only on income derived from Philippine sources, usually at a higher withholding rate.

III. Income Tax Rates under the TRAIN Law (R.A. No. 10963)

The TRAIN Law revised the income tax rates for individuals, simplifying the structure and introducing the following key changes:

A. For Individuals (Effective 2018)

Annual Taxable Income up to PHP 250,000 – Exempt from income tax.
Annual Taxable Income exceeding PHP 250,000 up to PHP 8,000,000 – Subject to graduated tax rates ranging from 20% to 35%.
Annual Taxable Income exceeding PHP 8,000,000 – Taxed at a fixed rate of 35%.

The TRAIN Law also adjusted the tax treatment of fringe benefits, de minimis benefits, and 13th-month pay, setting a cap of PHP 90,000 for the latter’s tax exemption.

B. For Corporations

Domestic and Resident Foreign Corporations – Corporate income tax rate initially set at 30% was reduced to 25% by the CREATE Act, which complements TRAIN’s objectives by lowering the corporate income tax rate and rationalizing fiscal incentives.
Non-Resident Foreign Corporations – Taxed at a flat rate of 25% on gross income sourced within the Philippines.

IV. Tax Treatment of Specific Types of Income

A. Passive Income

Interest Income – Subject to final withholding tax at 20% for residents and at varied rates for non-residents.
Dividends – Taxed at 10% for resident citizens and 15% for non-residents if a tax treaty applies.
Royalties – Subject to a 20% final withholding tax for residents and a 25% final withholding tax for non-residents.
Capital Gains – Taxed at a rate of 15% on capital gains from the sale of shares not traded on the stock exchange and at 6% on capital gains from the sale of real property classified as capital assets.

B. Business Income

Taxed according to the individual’s or corporation’s applicable income tax rate. The TRAIN Law also introduced optional standard deductions and simplified the income tax return process.

V. Provisions under the Ease of Paying Taxes Act (R.A. No. 11976)

The Ease of Paying Taxes Act introduced administrative reforms to streamline tax compliance:

Simplification of Filing – The Act reduces the frequency and volume of tax filings, allowing taxpayers to submit fewer and consolidated returns.
Taxpayer Classifications – The Act introduced taxpayer categories based on turnover, residence, and industry, simplifying compliance for micro, small, and medium enterprises (MSMEs).
Digitalization of Tax Processes – The Act mandated electronic submission of tax returns, payments, and other documentary requirements, reducing administrative burdens.
Simplified Processes for Small Taxpayers – MSMEs benefit from reduced compliance costs, and optional, simplified filing methods based on income or gross receipts.

VI. Income Tax Exemptions and Incentives

Philippine tax law provides several exemptions and incentives:

Special Economic Zones – Enterprises operating in special economic zones enjoy tax holidays, reduced tax rates, and other fiscal incentives.
Tax Holidays and Reduced Rates – Certain industries identified as strategic by the government (e.g., renewable energy, information technology) may qualify for preferential tax treatment.
Other Exemptions – Qualified non-stock, non-profit educational institutions, government agencies, and charitable organizations may be exempt from income tax, provided they meet specific regulatory requirements.

VII. Compliance Requirements

Taxpayers are required to file income tax returns and pay taxes according to deadlines prescribed by the BIR. Key compliance points include:

Quarterly and Annual Filing for Individuals and Corporations – Taxpayers must file returns quarterly, with an annual return filed at year-end.
Record-Keeping and Documentation – Taxpayers must maintain accurate records of income, deductions, and credits, and provide supporting documents upon request by the Bureau of Internal Revenue (BIR).

VIII. Penalties and Surcharges

The NIRC imposes penalties for non-compliance, including:

Deficiency Interest – Imposed on underpaid taxes.
Surcharges and Compromise Penalties – Applied for late payments, failure to file, and other infractions.
Fraud Penalties – Severe penalties, including criminal prosecution, for cases involving tax evasion and fraud.

Summary

The Philippine income tax system, guided by the NIRC as amended by the TRAIN Law and the Ease of Paying Taxes Act, establishes comprehensive rules on the taxability of income for individuals and corporations, covering sources within and outside the Philippines based on residency status. Key reforms have simplified compliance, provided relief to low- and middle-income taxpayers, and incentivized specific sectors while enforcing stringent penalties for non-compliance. Taxpayers must stay updated with the BIR’s regulations to ensure compliance and benefit from available incentives.