Legal Updates

Income tax is generally regarded as an excise tax or privilege tax, levied upon the right of a person or entity to receive income or profits. Income taxation in the Philippines is primarily governed by the 1987 Constitution and the National Internal Revenue Code of 1997 (NIRC), as amended by Tax Reform for Acceleration and Inclusion (TRAIN) Law and Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Law).

Criteria in Imposing Income Tax

1. Citizenship Principle – a citizen of the Philippines residing therein is taxable on all income derived from whatever sources whether within or without the Philippines, while citizen of the Philippines not residing therein is taxable only on income derived from sources within the Philippines.
2. Residence Principle – all income derived from sources within the Philippines by persons residing in the Philippines whether citizen or not, or domestic or foreign corporation, are subject to income tax.
3. Source Principle –- all income derived from sources within the Philippines are subject to income tax.

Kinds of Income Taxes

1. Normal/Net Income Tax – a tax on citizen and resident individual and non-resident alien engaged in trade or business on taxable income using the graduated rates of 0%-35%.

2. 8% Income Tax – a new income tax introduced by TRAIN Law. The 8% income tax is imposed on the total gross sales/receipts and other non-operating income which may or may not be in excess of Php250,000 depending on the personal income earner and the amount of the total gross sales/receipts and other non-operating income.

3. Gross Income Tax – a tax of 25% in case of a non-resident alien not engaged in trade or business and non-resident foreign corporation, on the entire income derived from all sources within the Philippines, except those subject to final income tax.

4. Final Income Tax – a tax imposed on passive income derived from sources within the Philippines. There are different final income tax rates depending on the type of income earned.

5. Regular Corporate Income Tax –Under the CREATE Law, the corporate income tax of domestic corporation is reduced to 25%, or 20% when the net taxable income does not exceed Php5,000,000 and the total assets does not exceed Php100,000,000), excluding land on which the particular business entity’s office, plant, and equipment are situated.

6. Minimum Corporate Income Tax – a tax of 2% on the gross income of a domestic and resident foreign corporation. This tax is payable only when it is higher than regular corporate income tax. Under CREATE Law, minimum corporate income tax is reduced to 1% effective 1 July 2020 until 30 June 2023.

7. Improperly Accumulated Earnings Tax – a 10% tax on improperly accumulated earnings of domestic corporation. CREATE Law repealed the tax provision imposing this tax effective 11 April 2021.

Final Tax on Capital Gains

1. Final tax of 15% based on the net capital gains realized from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange.

2. Final tax of 6% on the gross selling price or current fair market value as determined by the Commission, whichever is higher, upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets.

CORPORATE TAXES

The following summarizes the income taxation of corporate taxpayers:

1. Domestic Corporation