Income Tax on Special Corporations | Kinds of Taxpayers – Individual, Corporations, Trusts, Estate | Nature and General Principles | Income Tax | NIRC | TAXATION LAW

Income Tax on Special Corporations under the National Internal Revenue Code of 1997, as amended by the TRAIN Law and Ease of Paying Taxes Act

The National Internal Revenue Code (NIRC) of 1997, as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law (R.A. No. 10963) and further modified by the Ease of Paying Taxes Act (R.A. No. 11976), classifies taxpayers into individuals, corporations, trusts, and estates. Within the corporation classification, special corporations—typically defined as entities receiving particular treatment or classification based on their nature and purpose—are subject to unique income tax rules.

The TRAIN Law and the Ease of Paying Taxes Act have introduced and modified specific provisions related to the taxation of these special corporations, aiming to align their tax burdens with the government’s revenue goals and economic strategies.

I. Definition of Special Corporations

Special corporations refer to corporations granted particular tax treatment by law due to their unique status, activities, or functions. This category includes entities such as:

• Government-owned and controlled corporations (GOCCs)
• Nonprofit corporations
• Proprietary educational institutions and hospitals
• Non-stock, non-profit organizations
• Offshore banking units (OBUs)
• Regional operating headquarters (ROHQs)

Each type of special corporation is subject to its own tax regime and applicable exemptions under the NIRC, as amended.

II. Income Tax Regimes for Special Corporations

Special corporations are taxed on their taxable income, which may include income derived from trade, business, or other forms of activity. However, due to their unique nature, special corporations often qualify for preferential rates or tax exemptions. The income tax regime applicable to each type of special corporation is governed by specific sections of the NIRC, as amended.

A. Government-Owned and Controlled Corporations (GOCCs)

1. General Rule: GOCCs are generally subject to income tax based on their taxable income derived from all sources within and outside the Philippines, except those expressly exempt by law.

2. Specific Exemptions: The NIRC provides that certain GOCCs, such as the Government Service Insurance System (GSIS), Social Security System (SSS), Philippine Health Insurance Corporation (PhilHealth), and the Local Water Utilities Administration (LWUA), are exempt from income tax.

B. Proprietary Educational Institutions and Hospitals

1. Preferential Tax Rate: Under Section 27(B) of the NIRC, proprietary educational institutions and hospitals that are non-profit are generally taxed at a preferential income tax rate of 10% on their taxable income, provided they are non-profit and their income is used directly for their educational or hospital activities.

2. TRAIN Law Adjustments: The TRAIN Law retained this preferential tax rate but introduced stricter rules on documentation and substantiation to prevent abuse of the preferential rate.

3. Ease of Paying Taxes Act Implications: The Ease of Paying Taxes Act did not directly alter the tax rate but introduced procedural ease to improve compliance among these institutions.

C. Offshore Banking Units (OBUs)

1. Taxation of OBUs: Offshore banking units (OBUs) are subject to a special tax regime under the NIRC, paying a 10% tax on their gross income derived from foreign currency transactions with foreign residents and other OBUs, local commercial banks, and branches of foreign banks authorized by the Bangko Sentral ng Pilipinas (BSP) to operate as OBUs in the Philippines.

2. Exemptions and Exclusions: OBUs are exempt from all other forms of Philippine taxes on the aforementioned income. However, income derived from other sources not covered under their specific exemption is subject to the regular corporate income tax rate.

D. Regional or Area Headquarters (RHQs) and Regional Operating Headquarters (ROHQs)

1. Non-Taxable Status of RHQs: RHQs serve as administrative centers for their multinational corporations and are prohibited from earning or deriving income in the Philippines. Therefore, they are generally not subject to income tax but are liable for other taxes, such as the annual registration fee.

2. ROHQs and Preferential Tax Rate: ROHQs are subject to a 10% preferential tax rate on taxable income derived from services rendered to their affiliates, subsidiaries, or branches in the Philippines or abroad.

E. Non-Profit and Non-Stock Organizations

1. Income Tax Exemption: Non-profit and non-stock corporations organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, are exempt from income tax on income derived from activities related to their purpose.

2. Tax on Unrelated Income: Income from activities unrelated to their primary purpose is subject to the regular corporate income tax rate. The NIRC, as amended by the TRAIN Law, clarifies that the exemption applies only to income that directly supports the organization’s purpose and does not extend to income from unrelated trade or business activities.

III. Compliance Requirements under the Ease of Paying Taxes Act

The Ease of Paying Taxes Act introduced simplified compliance and reporting requirements for taxpayers, including special corporations. Key reforms include:

1. Streamlined Filing and Documentation: Simplified forms and reduced documentation requirements facilitate easier compliance for corporations qualifying for special tax regimes.

2. Enhanced Electronic Filing Systems: The Bureau of Internal Revenue (BIR) has improved its electronic systems to streamline tax filing and payments for all taxpayers, including special corporations.

3. Clearer Documentation for Exemptions and Preferential Rates: Special corporations availing of preferential rates or exemptions must provide appropriate documentation to substantiate their claims. The Ease of Paying Taxes Act emphasizes the importance of transparency in availing exemptions and tax reliefs.

IV. Recent Developments and Implications

The amendments to the NIRC, particularly under the TRAIN Law and the Ease of Paying Taxes Act, aim to ensure that only those special corporations genuinely entitled to preferential rates and exemptions can benefit from them. The reforms also reflect the government’s goal of broadening the tax base while ensuring fairness in the tax system. In summary:

1. Strengthened Compliance: Special corporations are required to maintain rigorous documentation to support their preferential tax status.

2. Tax Incentives Rationalization: The government has moved towards a rationalized tax incentive scheme, eliminating outdated or abused tax incentives.

3. Improved Tax Administration: Enhanced tax administration and electronic filing systems aim to reduce tax leakage and improve collections from special corporations.

Conclusion

Income taxation of special corporations in the Philippines involves a complex interplay of exemptions, preferential rates, and compliance requirements under the NIRC, as amended by the TRAIN Law and the Ease of Paying Taxes Act. These laws provide targeted tax relief to special corporations to support their roles in socio-economic development while ensuring that only legitimate beneficiaries receive such relief. For these entities, meticulous compliance with documentation and reporting requirements is crucial to maintain their preferential tax status.

Individual vs. Corporate Income Taxation – Schedular vs. Flat Rate | Kinds of Taxpayers – Individual, Corporations, Trusts, Estate | Nature and General Principles | Income Tax | NIRC | TAXATION LAW

Overview of Individual vs. Corporate Income Taxation: Schedular vs. Flat Rate under Philippine Tax Law

Under the National Internal Revenue Code (NIRC) of 1997, as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law (Republic Act No. 10963) and the Ease of Paying Taxes Act (Republic Act No. 11976), income taxation for individuals and corporations in the Philippines is structured differently. This distinction is rooted in two primary principles: schedular taxation for individual income and flat-rate taxation for corporate income. Each type of taxpayer—individual, corporation, trust, or estate—is subject to specific tax rules that govern the computation, rates, and compliance obligations for income tax.

---

A. Nature and General Principles of Income Taxation

Income tax is imposed on the income earned by individuals, corporations, trusts, and estates, regardless of the taxpayer's residence, nationality, or source of income. The Philippine tax system generally follows a global taxation principle, taxing all income earned by residents, whether from domestic or foreign sources, while non-residents are taxed only on income from Philippine sources.

The TRAIN Law and Ease of Paying Taxes Act introduced significant reforms to simplify compliance, adjust tax rates, and ease the tax burden on low- and middle-income taxpayers. These changes have further clarified the distinct approaches to individual and corporate income taxation.

---

B. Kinds of Taxpayers under Philippine Tax Law

1. Individual Taxpayers

   • Residents (citizens and aliens)
   • Non-residents (citizens and aliens)

2. Corporations

   • Domestic Corporations (organized under Philippine laws)
   • Resident Foreign Corporations (foreign corporations engaged in business in the Philippines)
   • Non-resident Foreign Corporations (foreign corporations not engaged in business in the Philippines but earning Philippine-sourced income)

3. Trusts and Estates

Each type of taxpayer has distinct tax rates, compliance requirements, and allowable deductions or exemptions.

---

C. Individual Income Taxation – Schedular System

The schedular system applies to individuals, where income tax rates increase progressively based on income brackets. This method primarily applies to the following:

• Compensation income earned from employment,
• Business or professional income earned from trade or practice,
• Other forms of income (e.g., capital gains).

1. Tax Rates for Individuals under the TRAIN Law

• Graduated Rates: Under the TRAIN Law, taxable income for individuals is subject to graduated rates, ranging from 0% to 35%.
• Bracketed System: Income is divided into brackets, each of which has a corresponding tax rate.
  • For example, taxable income not exceeding ₱250,000 is exempt, while income exceeding ₱8 million is taxed at the maximum rate of 35%.
• Personal and Additional Exemptions: The TRAIN Law eliminated the personal and additional exemptions that previously applied, streamlining the computation of taxable income.

2. Passive Income Tax

• Interest Income: Interest income from bank deposits is taxed at a flat rate of 20%.
• Dividends: Dividends received by individuals from domestic corporations are taxed at a flat rate of 10%.
• Capital Gains: Gains from the sale of shares listed on the stock exchange are taxed at 0.6%, while gains from sales of real property are subject to a 6% capital gains tax.

3. Compliance Requirements for Individuals

• Individuals are required to file an annual income tax return (ITR) on or before April 15 of each year.
• Those solely earning compensation income from one employer may opt to file a substituted filing form, where the employer withholds and remits taxes on their behalf.

---

D. Corporate Income Taxation – Flat Rate System

Corporations in the Philippines are subject to a flat rate system, meaning they are taxed at a uniform rate on net taxable income.

1. Tax Rates for Corporations under the TRAIN Law and CREATE Law (Corporate Recovery and Tax Incentives for Enterprises Act)

• Domestic Corporations:

  • General rate: 25% on net taxable income.
  • Small and medium corporations (SMEs) with net taxable income not exceeding ₱5 million and total assets not exceeding ₱100 million (excluding land) are subject to a reduced rate of 20%.

• Resident Foreign Corporations: Also subject to the flat 25% rate on Philippine-sourced income, though tax treaties may reduce this rate.

• Non-resident Foreign Corporations: Income from Philippine sources, such as dividends, interest, and royalties, is subject to a 30% final withholding tax, unless reduced by a tax treaty.

2. Minimum Corporate Income Tax (MCIT)

• Corporations are subject to a Minimum Corporate Income Tax (MCIT) of 2% of gross income, starting from the fourth year of operation.
• If a corporation’s regular income tax liability is less than the MCIT, it must pay the higher amount. Any excess MCIT over the regular corporate income tax can be carried forward and credited against future regular corporate income taxes for up to three years.

3. Passive Income Tax for Corporations

• Domestic corporations are subject to a 20% final tax on passive income derived from interest, royalties, and other income sources.
• For non-resident foreign corporations, passive income is taxed at rates prescribed in the NIRC or applicable tax treaties.

4. Compliance Requirements for Corporations

• Corporations must file an annual corporate income tax return on or before April 15 of each year or the 15th day of the fourth month following the close of the fiscal year.
• Quarterly income tax returns must also be filed for the first three quarters of the year, with payments made quarterly.

---

E. Comparative Analysis of Individual vs. Corporate Income Taxation

Feature	Individual Income Taxation	Corporate Income Taxation
Tax System	Schedular	Flat Rate
Tax Rates	Graduated (0% - 35%)	Flat (20% or 25%)
Bracketed Income	Yes (graduated)	No (flat rate)
Minimum Tax	Not applicable	MCIT (2%)
Passive Income	Separate rates for interest, dividends	Final withholding on passive income
Capital Gains	0.6% or 6%	6%
Compliance	Annual filing; substituted filing for some	Annual and quarterly filing

F. Key Legislative Amendments: TRAIN Law and Ease of Paying Taxes Act

The TRAIN Law reformed individual income tax rates to ease the burden on low- and middle-income earners and simplified corporate taxation. Meanwhile, the Ease of Paying Taxes Act introduced reforms aimed at reducing compliance complexity for both individual and corporate taxpayers, including electronic filing options, more efficient audits, and simplified return forms for MSMEs.

---

G. Conclusion

The NIRC, as amended by the TRAIN Law and Ease of Paying Taxes Act, has established a clear distinction between individual and corporate income taxation systems in the Philippines. The schedular approach for individual taxpayers ensures a progressive tax system where higher-income individuals bear a greater tax burden, while the flat-rate system for corporations aims to provide predictability and efficiency in business taxation. These changes underscore the government’s intent to create a fair, efficient, and simplified tax system for diverse taxpayer categories.

Kinds of Taxpayers – Individual, Corporations, Trusts, Estate | Nature and General Principles | Income Tax | National Internal Revenue Code of 1997 (NIRC), as amended by R.A. No.… | TAXATION LAW

Under the National Internal Revenue Code of 1997 (NIRC), as amended by R.A. No. 10963 (the Tax Reform for Acceleration and Inclusion or TRAIN Law) and further modified by R.A. No. 11976 (the Ease of Paying Taxes Act), there are distinct classifications and rules regarding income tax, especially concerning the different types of taxpayers. The following is an exhaustive and meticulous explanation of these classifications and their respective income tax implications.

I. Taxpayer Classifications under the NIRC

The NIRC identifies the following classifications of taxpayers for income tax purposes:

1. Individuals
2. Corporations
3. Trusts
4. Estates

Each category of taxpayer is subject to distinct income tax provisions, rates, and compliance requirements.

---

II. Individuals

A. Nature and Types of Individual Taxpayers

The NIRC, as amended by the TRAIN Law, further categorizes individual taxpayers based on residency, citizenship, and type of income earned.

1. Resident Citizens

   • Subject to tax on income derived from both within and outside the Philippines.
   • Liable for progressive tax rates under the TRAIN Law, which established new tax brackets effective January 1, 2018.

2. Non-resident Citizens

   • Taxed only on income derived from Philippine sources.
   • Non-residency applies if the citizen has physically left the Philippines with the intent to reside abroad permanently, has been abroad for over 183 days, or is considered an Overseas Filipino Worker (OFW) who meets the conditions under the law.

3. Resident Aliens

   • Subject to tax only on income derived from Philippine sources.
   • Residency is determined by the presence and duration of stay within the Philippines (typically defined as over 180 days of stay).

4. Non-resident Aliens

   • Engaged in Trade or Business: Taxed on income derived from Philippine sources at graduated rates (similar to resident aliens).
   • Not Engaged in Trade or Business: Subject to a final withholding tax of 25% on gross income from Philippine sources.

B. Tax Rates for Individuals

The TRAIN Law introduced new income tax rates for individuals effective January 1, 2018, applicable to both resident citizens and resident aliens:

• Graduated Tax Rates:

  • Income up to PHP 250,000 is exempt from tax.
  • Tax rates range from 20% to 35% for income exceeding PHP 250,000, with different rates applying to various income brackets.
  • After December 31, 2022, adjusted income brackets apply under the TRAIN Law, which further fine-tuned the rates.

• Final Taxes on Certain Types of Income:

  • Interest, royalties, and dividends may be subject to final withholding taxes.
  • Non-resident aliens not engaged in trade or business pay a final withholding tax rate of 25% on their gross income.

---

III. Corporations

A. Classification of Corporations

1. Domestic Corporations

   • Corporations established or organized under Philippine laws are subject to tax on all income, both from within and outside the Philippines.

2. Resident Foreign Corporations

   • Corporations organized under foreign laws but engaged in trade or business within the Philippines.
   • Taxed on income derived solely from Philippine sources.

3. Non-resident Foreign Corporations

   • Corporations organized under foreign laws and not engaged in trade or business within the Philippines.
   • Subject to final withholding tax rates on certain types of passive income from Philippine sources.

B. Tax Rates for Corporations (as modified by the TRAIN Law and subsequent laws)

1. Domestic and Resident Foreign Corporations:

   • The Corporate Income Tax (CIT) rate is 25% on net taxable income, with a reduced rate of 20% applicable to domestic corporations with net taxable income not exceeding PHP 5 million and total assets not exceeding PHP 100 million.

2. Minimum Corporate Income Tax (MCIT):

   • Imposed at a rate of 1% of gross income, effective from July 1, 2020, until June 30, 2023, under the CREATE Act.

3. Non-resident Foreign Corporations:

   • Subject to a 25% final withholding tax on gross income derived from Philippine sources (e.g., dividends, interests, royalties).

---

IV. Trusts and Estates

A. Tax Treatment of Trusts

1. Definition and Scope:

   • A trust is a legal arrangement where a trustee holds and manages assets for the benefit of beneficiaries.
   • Trusts are treated as separate taxpayers under the NIRC, and income generated within a trust is subject to taxation.

2. Income Tax Rates:

   • Trusts are subject to the same graduated income tax rates applicable to individual taxpayers.
   • The income tax applies to the income retained within the trust; distributed income to beneficiaries may be subject to taxation at the beneficiaries' level.

B. Tax Treatment of Estates

1. Definition:

   • An estate is the total property or assets left by a deceased person, which is subject to taxation until transferred to legal heirs.

2. Income Tax Rates:

   • Estates are also subject to the graduated income tax rates applicable to individual taxpayers.
   • The income earned by an estate during the period of administration or settlement is taxable, and the rates are computed similarly to those applicable to individuals.

---

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

The Ease of Paying Taxes Act introduced reforms aimed at simplifying tax compliance requirements, which apply to all types of taxpayers.

1. Simplified Filing and Payment Procedures:

   • Streamlined and more user-friendly tax filing processes, particularly for individual taxpayers and small businesses.

2. Single-Tier Filing System:

   • Simplified filing procedures that consolidate certain tax returns, reducing compliance burdens for corporations and trusts.

3. Administrative and Procedural Reforms:

   • Enhanced taxpayer services, expanded digitalization of tax compliance processes, and clarified tax rulings to assist all types of taxpayers, from individuals to corporations.

---

Summary

The NIRC, as amended by the TRAIN Law and the Ease of Paying Taxes Act, provides a clear categorization of taxpayers, each with distinct income tax obligations. Individual taxpayers are subject to progressive tax rates, while corporations face a corporate income tax with specific rates for domestic, resident foreign, and non-resident foreign corporations. Trusts and estates, treated similarly to individuals, must comply with graduated tax rates. The recent Ease of Paying Taxes Act enhances tax compliance through streamlined processes, particularly benefiting individual taxpayers and small businesses.

Types of Philippine Income Taxes | Nature and General Principles | Income Tax | National Internal Revenue Code of 1997 (NIRC), as amended by R.A. No.… | TAXATION LAW

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.

Criteria in Imposing Philippine Income Tax | Nature and General Principles | Income Tax | National Internal Revenue Code of 1997 (NIRC), as amended by R.A. No.… | TAXATION LAW

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:

1. 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%.

2. 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:

1. 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.

2. 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.

3. 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

1. 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.

2. 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

1. 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.

2. 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.

3. 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

1. 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.

2. 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.

3. 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

1. 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.

2. 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

1. Penalties and Surcharges

   • Penalties for late filing, failure to file, or underpayment include surcharges, interest penalties, and possible criminal prosecution under the NIRC.

2. 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.

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

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.