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

1. Overview of Philippine Income Tax System

The Philippine income tax system is rooted in the National Internal Revenue Code (NIRC) of 1997 as amended, primarily by the Tax Reform for Acceleration and Inclusion (TRAIN) Law (Republic Act No. 10963) and Ease of Paying Taxes Act (Republic Act No. 11976). These laws aim to modernize and simplify the tax regime, ensuring progressive taxation, easing compliance, and increasing government revenue while stimulating economic growth.

2. Nature and General Principles of Income Taxation

Income tax is levied on income derived within and outside the Philippines by citizens and on Philippine-sourced income by non-residents. The Philippines follows the global tax principle for residents, meaning income earned globally is taxable. For non-residents, the source principle applies, taxing only income from Philippine sources.

Key principles include:

Ability-to-Pay Principle: Higher earners pay a larger percentage.
Progressive Taxation: Tax rates increase with income.
Equity and Fairness: Ensures an equitable contribution to state revenue.
Revenue Sufficiency: Generates adequate revenue to support government operations.
Simplicity and Transparency: Laws and processes are designed to be clear and accessible.

3. Types of Philippine Income Taxes

Under the amended NIRC, there are several types of income taxes in the Philippines:

a. Individual Income Tax

Coverage: Applies to all individuals, whether residents or non-residents, including Filipino citizens, resident aliens, and non-resident aliens.
Taxable Income: Includes wages, salaries, business income, professional income, capital gains, and other income.
Rates:
- Resident Citizens and Resident Aliens: Subject to progressive rates from 20% to 35%.
- Non-Resident Aliens: Non-residents engaged in trade or business in the Philippines are taxed at the same rates, while non-residents not engaged in business are taxed at a flat 25%.
TRAIN Law Changes: The TRAIN Law restructured individual income tax rates, providing relief for low- to middle-income earners and imposing a higher tax on high-income individuals.
Personal and Additional Exemptions: TRAIN removed these exemptions but retained deductions for individuals who are self-employed or professionals through optional deductions or itemized deductions.

b. Corporate Income Tax

Coverage: Applicable to domestic and foreign corporations, including partnerships.
Rates:
- Domestic Corporations: Generally taxed at 30% on worldwide income. However, as of CREATE Act amendments, the rate has been reduced to 25% for corporations with net taxable income above PHP 5 million and total assets above PHP 100 million.
- Resident Foreign Corporations: Taxed at 25% on Philippine-sourced income.
- Non-Resident Foreign Corporations: Subject to a 25% final withholding tax on gross income from Philippine sources.
Minimum Corporate Income Tax (MCIT): Applied at a rate of 1% of gross income (reduced from 2% under the TRAIN Law) when no or minimal taxable income is earned after deductions.
Improperly Accumulated Earnings Tax (IAET): Levied at 10% on improperly accumulated earnings of corporations, dissuading profit retention to avoid income tax.

c. Capital Gains Tax

Sale of Real Property: A 6% tax on the gain from the sale of real property classified as capital assets.
Sale of Shares of Stock:
- Not Traded on the Stock Exchange: Taxed at 15% on net capital gains.
- Traded on the Stock Exchange: Subject to a stock transaction tax at 0.6% on gross selling price.

d. Final Withholding Tax on Passive Income

Interest Income: Taxed at a flat rate of 20%.
Dividends:
- Resident Individuals: 10% withholding tax.
- Non-Resident Foreign Corporations: Generally taxed at 15%.
Royalties: Subject to 20% tax on residents and 25% for non-residents.
Prizes and Winnings: Taxed at a rate of 20%, while certain winnings from special sources may be exempt or subject to different rates.

e. Business Income Tax on Self-Employed and Professionals (SEPs)

Coverage: Applies to self-employed individuals and professionals who earn business income, whether as sole proprietors, freelancers, or independent contractors.
Tax Regimes:
- Optional Standard Deduction: Allows for a standard 40% deduction on gross sales.
- Graduated Tax Rates: Taxed based on individual progressive tax rates.
- 8% Gross Sales Tax: For SEPs earning up to PHP 3 million in gross sales or receipts who elect this simpler tax scheme over graduated rates.
Simplified Tax Compliance: Under R.A. 11976, the law promotes simplified reporting requirements and aims to ease the administrative burden on SEPs.

4. Taxation of Specific Types of Entities and Income

General Partnerships: Subject to corporate tax on net income.
Special Economic Zone Enterprises and PEZA-Registered Entities: May qualify for preferential tax rates.
Cooperatives: Exempt from income tax on activities exclusively for members.

5. Key Provisions under the Ease of Paying Taxes Act (R.A. 11976)

The Ease of Paying Taxes Act introduced measures to simplify the tax process and reduce the compliance burden, especially for small and medium enterprises and individual taxpayers:

Simplified Tax Returns and Payment Processes: Reduced forms and streamlined filing, particularly for small business owners.
Simplified Registration Requirements: Less paperwork for business registration and faster processes.
Use of Online Platforms: Encourages electronic filing and payment systems to ease tax compliance.

6. Filing and Payment Requirements

Filing Deadlines: Income tax returns for individuals are due on or before April 15 following the close of the taxable year.
Withholding Tax Obligations: Employers and certain payors must withhold taxes on salaries, passive income, and other taxable payments.
Payment of Quarterly Taxes: Taxpayers must file quarterly income tax returns, with final payment of the annual income tax due on the filing date.

7. Anti-Avoidance Provisions

Transfer Pricing Rules: Aligns with international standards to prevent tax avoidance by setting pricing guidelines for related-party transactions.
Substituted Filing for Employees: For employees whose tax obligations are fully withheld by employers, simplified compliance measures are available.

8. Recent Amendments and Key Considerations

TRAIN Law Enhancements: Provided significant relief to low-income earners, modernized tax brackets, and streamlined compliance.
Implementation of CREATE Act Provisions: Complemented corporate tax relief and incentives, supporting business recovery and expansion.
Ease of Paying Taxes Act Innovations: Continued reforms focus on simplifying compliance, particularly for small taxpayers, and adapting digital tools to improve efficiency.

9. Summary of Philippine Income Taxation Principles

The Philippine income tax system balances equity, revenue sufficiency, and simplicity. Through progressive income tax rates, withholding mechanisms, and simplified compliance for lower-income taxpayers and SEPs, the system aims to ensure fair contribution while easing the administrative burden.