Philippine Income Taxation: Criteria in Imposing Philippine Income Tax under the NIRC and Relevant Amendments (TRAIN Law and Ease of Paying Taxes Act)

I. Overview of Philippine Income Taxation Framework

Philippine income taxation is a national tax levied on both individuals and corporations. The tax system applies to income derived from all sources within and outside the Philippines, depending on the taxpayer’s residency and citizenship. The legal framework governing income taxation is primarily encapsulated in the National Internal Revenue Code of 1997 (NIRC), as amended by Republic Act No. 10963 (the TRAIN Law) and Republic Act No. 11976 (Ease of Paying Taxes Act).

The criteria for imposing income tax in the Philippines center on several key principles, including the taxpayer’s classification, source of income, residence status, and citizenship.

II. Classification of Taxpayers for Income Tax Purposes

Taxpayer classification is fundamental to determining how and to what extent Philippine income tax applies. Taxpayers in the Philippines are categorized as follows:

Individuals
- Resident Citizens: Taxed on worldwide income, including both Philippine and foreign-sourced income.
- Non-resident Citizens: Taxed only on Philippine-sourced income.
- Resident Aliens: Taxed only on Philippine-sourced income.
- Non-resident Aliens Engaged in Trade or Business (NRAETB): Taxed on Philippine-sourced income at the same rates as resident citizens but under specific conditions.
- Non-resident Aliens Not Engaged in Trade or Business (NRANETB): Taxed on Philippine-sourced income at a flat rate of 25%.
Corporations
- Domestic Corporations: Taxed on worldwide income.
- Resident Foreign Corporations: Taxed only on income derived from Philippine sources.
- Non-resident Foreign Corporations: Taxed on their Philippine-sourced income at a flat 25% rate.

III. Criteria for Imposing Philippine Income Tax

The criteria for imposing Philippine income tax depend on the following key elements:

Source of Income
- The NIRC defines income as taxable if it is sourced from the Philippines, meaning income generated within the territorial jurisdiction of the country. For residents and domestic corporations, income from all sources, including foreign-sourced, is taxable.
- Key Sources include income from services rendered, business operations, and property transactions within the Philippines.
Residence and Citizenship Status
- Residents (citizens and corporations) are taxed on a global basis, while non-residents are taxed only on income sourced within the Philippines.
- Citizenship plays a role, especially in defining the taxability of non-resident citizens, such as Overseas Filipino Workers (OFWs), who may have exemptions on foreign income based on certain residency requirements.
Engagement in Trade or Business
- Non-resident aliens are taxed differently depending on their engagement in trade or business in the Philippines. Engaged aliens are taxed progressively, while those not engaged are taxed at a flat rate, irrespective of income amount.

IV. Income Tax Regime as Amended by TRAIN Law and Ease of Paying Taxes Act

TRAIN Law (R.A. No. 10963)
- The TRAIN Law, effective in 2018, restructured the personal income tax brackets for individuals, allowing tax reductions for low- and middle-income earners and imposing higher rates on higher earners.
- Under TRAIN:
  - Individuals earning below PHP 250,000 annually are exempt from income tax.
  - Tax rates for high-income individuals increased, with a top marginal rate of 35%.
- For corporations, TRAIN implemented a flat corporate income tax rate of 25% for domestic and resident foreign corporations, with the CREATE Law further reducing the corporate tax rate to 20% for certain small corporations.
Ease of Paying Taxes Act (R.A. No. 11976)
- Enacted to improve tax compliance by simplifying filing and payment processes, R.A. No. 11976 does not alter tax rates but rather focuses on accessibility and administrative efficiency.
- Key Provisions include the simplification of tax returns, relaxed documentary requirements, and enhanced digital filing and payment mechanisms.

V. Taxation Principles Governing Income Tax

Ability-to-Pay Principle
- Tax rates are progressive for individuals, aligning with the taxpayer’s capacity to contribute based on income level. The progression is from 0% to 35%, as structured under the TRAIN Law.
Source-of-Income Principle
- The Philippine tax system asserts taxation on income based on its territorial source. Thus, all income earned within Philippine territory is subject to tax, even for non-resident aliens and foreign corporations.
Global Taxation for Residents and Citizens
- For resident citizens and domestic corporations, income from both local and foreign sources is taxable, embodying the global taxation principle. The Philippines offers tax credits on foreign-sourced income to avoid double taxation.

VI. Exemptions, Exclusions, and Deductions

Personal Exemptions and Additional Exemptions
- Exemptions on minimum wage earners and income tax exemptions on the first PHP 250,000 for individuals contribute to tax relief, especially for low-income earners.
Allowable Deductions
- Ordinary Deductions: Expenses necessary for generating income, such as operational expenses.
- Special Deductions: Include optional standard deductions (OSD), allowing individuals and corporations a simplified calculation by deducting a flat percentage from gross income.
- Deductions for Foreign Income: To avoid double taxation, residents and citizens earning foreign income may claim tax credits for taxes paid abroad.
Exclusions from Gross Income
- Certain income types are excluded from gross income, such as certain fringe benefits, retirement benefits, and income of OFWs, subject to specific rules.

VII. Tax Filing and Compliance

Filing Periods and Payment Deadlines
- The tax year for individual taxpayers follows the calendar year. Corporate taxpayers may have either a fiscal year or calendar year basis.
- Filing deadlines vary based on tax type, with annual income tax returns due every April 15.
Administrative Reforms for Compliance
- Under R.A. No. 11976, the BIR emphasizes digital platforms for filing and payment, intending to make compliance more accessible and reduce administrative burdens.

VIII. Implications of Non-Compliance

Penalties and Surcharges
- Penalties for late filing, failure to file, or underpayment include surcharges, interest penalties, and possible criminal prosecution under the NIRC.
BIR Audit and Assessment
- Taxpayers may be subject to BIR audit to verify compliance. The Bureau of Internal Revenue holds the right to examine returns and assess additional taxes when discrepancies arise.

IX. Summary

The Philippine income tax system is governed by residency, citizenship, and source-of-income principles. Amendments from TRAIN and R.A. No. 11976 reflect the government’s dual goals of progressive taxation and administrative simplification. By understanding taxpayer classification, source of income, and compliance requirements, taxpayers can navigate the complexities of the Philippine tax system effectively.