I. Nature and General Principles of Income Tax under the National Internal Revenue Code of 1997 (NIRC), as Amended by TRAIN Law and Ease of Paying Taxes Act

1. Income Tax: Overview and Definition

Income tax is a direct tax imposed on the annual income of individuals and corporations. In the Philippines, income tax is governed primarily by the National Internal Revenue Code of 1997 (NIRC), which has undergone significant amendments, most notably through the Tax Reform for Acceleration and Inclusion (TRAIN) Law (Republic Act No. 10963) and the Ease of Paying Taxes Act (Republic Act No. 11976). These reforms were enacted to enhance tax efficiency, encourage compliance, increase revenue, and simplify the tax process for both individuals and businesses.

2. Legal Basis and Authority

The NIRC, as amended, grants the Bureau of Internal Revenue (BIR) the authority to administer and enforce all national tax laws. The Philippine Constitution provides the legislative authority to impose taxes, with specific limitations on the power to tax to avoid excessive burdens on taxpayers. Taxes, including income tax, are designed to fund the operations of the government, promote equity in wealth distribution, and finance public services.

II. Amendments through the TRAIN Law (RA 10963)

1. Objectives of the TRAIN Law

The TRAIN Law, effective January 1, 2018, aims to simplify the tax system, reduce poverty, and improve tax compliance. Its primary goals concerning income tax include:

Reducing the income tax burden on low- and middle-income earners.
Broadening the tax base by minimizing exemptions and increasing tax rates for higher income brackets.
Enhancing revenue generation for the government.

2. Key Changes in Income Tax under TRAIN

Individual Income Tax Rates: TRAIN introduced a progressive tax rate structure, exempting individuals with annual taxable incomes of ₱250,000 or below, while increasing tax rates for higher income brackets (up to 35% for individuals earning over ₱8 million annually).
Estate and Donor’s Tax: Lowered estate and donor’s tax rates, imposing a single tax rate of 6% on net estates and donations.
Self-employed and Mixed Income Earners: Provided preferential rates for self-employed individuals and professionals earning below ₱3 million in gross receipts, with a choice between an 8% flat tax or the graduated rates.
Compensation Income Earners: Allowed non-taxation of the 13th month pay and other benefits up to ₱90,000.
Capital Gains and Passive Income: Increased tax rates on passive income, including capital gains from the sale of unlisted shares, interest income, and dividends, to broaden the tax base.

III. Amendments under the Ease of Paying Taxes Act (RA 11976)

1. Purpose of the Ease of Paying Taxes Act

Enacted in 2023, the Ease of Paying Taxes Act seeks to improve tax compliance by simplifying the tax process, reducing administrative burdens, and encouraging voluntary compliance. It aims to:

Streamline tax processes, including income tax filing and payment.
Enhance BIR’s digital infrastructure to support electronic filing and payment.
Establish taxpayer assistance centers to provide more efficient services.

2. Salient Points of RA 11976 Impacting Income Tax

Simplified Filing Procedures: Introduced simplified tax filing requirements for self-employed individuals, micro, small, and medium enterprises (MSMEs), and other entities with simplified payment options.
Digitalization of Tax Administration: Mandated BIR to enhance its e-filing and e-payment systems to facilitate faster and more efficient tax transactions.
Extended Filing Deadlines: Provided more flexibility for taxpayers by extending deadlines for the filing of returns and payment of taxes.

IV. Fundamental Principles of Philippine Income Tax

Philippine income tax law is grounded on principles that ensure fair taxation while balancing the need for public revenue and the protection of individual taxpayer rights. The general principles include:

1. Ability to Pay Principle

The Philippine income tax system follows the ability-to-pay principle, whereby individuals and entities with higher income bear a larger portion of the tax burden. The progressive tax structure is designed to ensure equitable taxation and minimize the burden on low-income earners.

2. Source of Income Principle

Only Philippine-sourced income of non-resident aliens and foreign corporations is subject to income tax, while residents and domestic corporations are taxed on worldwide income. This principle aligns with the doctrine of territoriality in taxation.

3. Tax Equity and Progressivity

The NIRC, as amended by the TRAIN Law, is intended to be progressive, ensuring that taxpayers with higher incomes pay higher tax rates. This is aligned with the constitutional mandate for a progressive taxation system to promote economic equality.

4. Withholding Tax System

The withholding tax system facilitates income tax collection by requiring the payer to withhold tax from the income of the recipient. Withholding taxes can be either final or creditable, simplifying tax compliance and ensuring regular revenue inflows for the government.

5. Self-Assessment and Voluntary Compliance

Philippine tax law operates on the principle of self-assessment, where taxpayers calculate their tax liability based on their income and deductions. Taxpayers are expected to voluntarily comply with tax laws, with the BIR primarily acting as an enforcer of compliance.

V. Scope and Coverage of Income Tax

1. Individual Taxpayers

Income tax applies to both residents and non-residents, with different scopes:
- Resident Citizens: Taxed on all income derived from sources within and outside the Philippines.
- Non-resident Citizens: Taxed only on income sourced within the Philippines.
- Resident Aliens: Taxed on Philippine-sourced income only.
- Non-resident Aliens: Generally subject to a final tax on gross income from Philippine sources.

2. Corporate Taxpayers

Corporations are subject to income tax based on residency and source of income:
- Domestic Corporations: Taxed on worldwide income.
- Foreign Corporations: Subject to tax only on Philippine-sourced income.
Under the TRAIN law, corporate income tax reforms include specific provisions for small businesses and adjustments to the tax rates to encourage investments.

3. Tax-Exempt Entities and Income

The NIRC provides certain exemptions from income tax, such as income derived from activities by government-owned and controlled corporations engaged in essential public services, income from qualified cooperatives, and income earned by entities under special laws or international agreements.

VI. Compliance Requirements under NIRC, TRAIN Law, and Ease of Paying Taxes Act

1. Filing of Income Tax Returns

Individuals and corporations are required to file annual income tax returns by April 15 of each year for income earned in the previous calendar year. The Ease of Paying Taxes Act introduced simplified and digital filing procedures to ease compliance.

2. Payment of Income Tax

Taxes are paid in quarterly installments for corporations, while individuals may settle through final withholding, quarterly payments, or lump-sum payments upon filing of annual returns. TRAIN and RA 11976 encourage electronic payment options to improve efficiency.

3. Record-Keeping and Documentation

Taxpayers must keep proper records to substantiate income, deductions, and exemptions. Compliance with documentation requirements is critical for audit purposes and aligns with self-assessment principles in tax law.

VII. Enforcement and Penalties

1. Tax Audit and Assessment

The BIR has the authority to audit tax returns to verify accuracy and compliance. If discrepancies or underpayments are discovered, the BIR may issue an assessment for additional taxes due, along with interest and penalties.

2. Penalties for Non-compliance

Penalties for non-compliance with income tax obligations include interest, surcharges, and potential criminal liabilities for fraudulent returns or willful evasion. TRAIN Law increased penalties for tax evasion, while the Ease of Paying Taxes Act focused on facilitating compliance to reduce unintentional non-compliance.

VIII. Conclusion

The framework for income tax in the Philippines under the NIRC, TRAIN Law, and the Ease of Paying Taxes Act is structured to create an equitable, progressive, and efficient tax system. These laws underscore the principles of taxpayer equity, revenue sufficiency, and administrative simplicity, aiming to balance the need for government revenue with taxpayer capabilities and compliance facilitation.