Republic of the Philippines

DEPARTMENT OF FINANCE
NATIONAL TAX RESEARCH CENTER
3/F Palacio del Gobernador Condominium
Gen. Luna Street cor. A. Soriano Jr. Avenue
Intramuros, Manila,

DIRECT TAXATION
(Income Taxes)

Presented by:

COURLLIE COURTNEY C. NANQUIL

Tax Specialist I

May 23, 2019

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OBJECTIVES

1. To give an overview of the general principles

of taxation; and

2. To present the features of the Philippine

income tax system.

2
 General Structure and
Principles of the Direct Tax
System

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WHAT IS TAXATION?

 It is the power by which the sovereign raises

revenue to defray the expenses of government.
It is a way of apportioning the cost of
government among those who in some measure
are privileged to enjoy its benefits and must bear
its burden.

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WHAT IS DIRECT TAXATION?

 Direct Tax – is a tax which is exacted from the

very persons who are primarily liable to pay
them; the taxpayer cannot shift the burden of its
payment to another. The liability for the payment
of the tax (incidence), as well as the impact
(burden) of the tax falls on the same person.
 Examples:
 Personal Income Tax
 Corporate Income Tax
 Estate Tax
 Donor’s Tax
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UNDERLYING PRINCIPLES BEHIND THE
POWER OF TAXATION
 Principle of Necessity - the existence of the
government is a necessity and it cannot continue
without means to support itself.

 Benefit-Received Theory - The government and

the people have the reciprocal and mutual duties of
support and protection to one another. (Symbiotic
relationship of the government and the taxpayer)

 Lifeblood Doctrine - Taxes are the lifeblood of the

government without which it can neither exist nor
endure. Without money the government cannot
deliver services to the people or function and serve
the people.
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FUNDAMENTAL PRINCIPLES OF
TAXATION
 Ability-to-Pay Principle - each subject of every State ought to
contribute to the support of the government as nearly as possible in
proportion to the revenue which they respectively enjoy under its
protection.

 Uniform and Equitable - A tax is uniform when it operates with the

same force and effect in the taxing jurisdiction where the subject of it
is found. A tax is deemed equitable if it is based on the ability-to-pay
principle.

 Just - the taxes which each person has to pay ought, as respect to
the time and manner of payment and the sum to be paid, to be
certain and not arbitrary.

 Convenience - The tax measure ought to be levied at the time and

in the manner in which it is most likely to be convenient to the
taxpayer who pays it.
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WHAT IS INCOME?

 Income is any wealth which flows into the

taxpayer other than as a mere return of capital.
It includes the forms of income specifically
described as gains and profits including gains
derived from the sale or other disposition of
capital assets.

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WHEN IT IS TAXABLE?

 An income is taxable when:

 There is income, gain, or profit;

 The income, gain, or profit is RECEIVED or

REALIZED during the taxable year; and

 The income, gain, or profit is NOT EXEMPT

from tax.

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INCOME TAXATION

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GENERAL PRINCIPLES OF INDIVIDUAL
INCOME TAXATION IN THE PHILIPPINES
 A citizen of the Philippines residing therein is taxable
on all income derived from sources within and
without the Philippines;

 A nonresident citizen is taxable only on income

derived from sources within the Philippines;

 An individual citizen of the Philippines who is

working and deriving income from abroad as an
overseas contract worker is taxable only on income
derived from sources within the Philippines;

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GENERAL PRINCIPLES OF INDIVIDUAL
INCOME TAXATION IN THE PHILIPPINES
 An alien individual, whether a resident or not of
the Philippines, is taxable only on income
derived from sources within the Philippines.

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GENERAL PRINCIPLES OF CORPORATE
INCOME TAXATION IN THE PHILIPPINES
 A domestic corporation is taxable on all income
derived from sources within and without the
Philippines; and

 A foreign corporation, whether engaged or not in

trade or business in the Philippines, is taxable
only on income derived from sources within the
Philippines.

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WHO ARE SUBJECT TO TAX?
Individual Taxpayers
 Citizens
Resident Citizens
Non-resident Citizens
 Aliens
Resident Aliens
Non-resident Alien
Engaged in trade or business
Not engaged in trade or business

Corporate Taxpayers
 Domestic Corporations
 Foreign Corporation
Resident Foreign Corporation
Non-resident Foreign Corporation
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PERSONAL INCOME TAX RATES

Beginning on January 1, 2018:

Over Not Over Tax Due

0 250,000 0%
250,000 400,000 20%
400,000 800,000 P30,000+25% of the excess of P400,000
800,000 2,000,000 P130,000+30% of the excess of P800,000

2,000,000 8,000,000 P490,000+32% of the excess of P2,000,000

8,000,000 - P2,410,000+35% of the excess of P8,000,000

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PERSONAL INCOME TAX RATES

Beginning on January 1, 2023:

Over Not Over Tax Due

0 250,000 0%
250,000 400,000 15%
400,000 800,000 P22,500+20% of the excess of P400,000
800,000 2,000,000 P102,500+25% of the excess of P800,000

2,000,000 8,000,000 P402,500+30% of the excess of P2,000,000

8,000,000 - P2,202,500+35% of the excess of P8,000,000

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PERSONAL INCOME TAX RATES
(ALIENS)
Taxpayer Tax Base Tax Rates
1. Alien
A. Resident Alien Taxable Compensation Income 0% - 35%
(TCI)/Taxable Business Income
(TBI)
B. Nonresident Alien
i. Engaged in trade or TCI/TBI 0% - 35%
business in the Philippines
ii. Not engaged in trade or Taxable Gross Income (TGI) 25%
business in the Philippines
iii. Alien employed by:
(1) Regional or Area TGCI 15%
Headquarters (RHQ) or
Regional Operating
Headquarters (ROHQ)
(2) Offshore Banking Units TGCI 15%
(OBU)
(3) Petroleum service TGCI 15%
contractors and
subcontractors

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SELF-EMPLOYED INDIVIDUALS AND/OR
PROFESSIONALS
Amount of Gross Receipts/Gross Sales
(GR/GS)
Less than P250,000
P250,000 - P3,000,000
More than P3,000,000
Taxation
Exempt
8% tax on GR/GS and other non-
operating income in excess of
P250,000 in lieu of graduated
income tax rates under Section
24(A)(2)(a) and the percentage
tax
Regular PIT rates ranging from
0%-35% and percentage tax
equivalent to 3% of gross
quarterly sales or receipts
Regular PIT rates
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WITHHOLDING TAX RATES FOR
INDIVIDUALS
Non-resident
Non-resident
Aliens not
Resident Citizen Aliens Engaged
Type of Income Engaged in
or Alien in Trade or
Trade or
Business
Business
Dividends 10% 20% 25%
Royalties 20% 20% 25%
Interest 20% 20% 25%
Capital gains from 15% 15% 15%
share of shares of
stock not traded
at the stock
exchange
Capital gains from 6% - -
sale of real
property

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CORPORATE INCOME TAX RATES AND
BASE

Particulars Tax Rate Tax Base

Regular Corporate Income Tax
Domestic Corporation 30% Taxable Net Income
(TNI)

Resident Foreign Corporation 30% TNI

Non-Resident Foreign Corporation 30% Gross Income (GI)
Minimum Corporate Income Tax 2% GI

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 TAX-EXEMPT CORPORATIONS
Those corporations not organized principally for profit under Section 30 of the NIRC of 1997, as
amended:

1. Labor, agricultural or horticultural organizations;

2. Mutual savings banks;
3. Beneficiary societies or associations;
4. Cemetery companies owned and operated exclusively for the benefit of its members;
5. Nonstock corporations or associations organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, no part of its net income or asset inure to the
benefit of any specific person;
6. Chambers of commerce;
7. Civic leagues or organizations operated exclusively for the promotion of social welfare;
8. Nonstock and nonprofit educational institutions;
9. Government educational institutions;
10. Farmers' or other mutual typhoon or fire insurance companies, mutual ditch or irrigation
companies, mutual or cooperative telephone companies, or the like; and
11. Farmers’ fruit growers’ or like associations.

Government-Owned and/or-Controlled Corporations (GOCCs) under Section 27(C) of the NIRC of 1997,
as amended, i.e., Government Service Insurance System (GSIS), Social Security System (SSS),
Philippine Health Insurance Corporation (Philhealth), and Local Water Districts (LWD)

2
1
CORPORATIONS ENJOYING
PREFERENTIAL TAX RATES
NIRC
TAXPAYERS TAX BASE TAX RATES
SECTION

A. Domestic Corporations
a. Proprietary Educational Institutions and Hospitals Sec. 27(B) NTI 10% or 30%
b. Depository Banks Under the EFCDS Sec. 27(D)(3) NTI 30% or, 10%, or
exempt%
B. Resident Foreign Corporations
a. International Carriers Sec. 28(A)(3) Gross Philippine 2.5%, or Preferential
Billings (GPB) Tax Rate, or Exempt
b. Offshore Banking Units Sec. 28(A)(4) NTI 30%, or 10%, or
Exempt
c. Regional or Area Headquarters of Multinational Sec. 28(A)(6)(a) - Exempt
Corporations
d. Regional Operating Headquarters of Multinational Sec. 28(A)(6)(b) NTI 10%
Corporations
e. Depository Banks Under the EFCDS Sec. 28(A)(7)(b) NTI 30%, or 10%, or
exempt
C. Non-Resident Foreign Corporations
a. Nonresident Cinematographic Film Owners, Sec. 28(B)(2) GI 25%
Lessors or Distributors
b. Nonresident Owner or Lessor of Vessels Sec. 28(B)(3) GI 4.5%
Chartered by Philippines Nationals
c. Nonresident Owner or Lessor of Aircrafts, Sec. 28(B)(4) GI 7.5%
Machineries, and Other Equipment
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MINIMUM CORPORATE INCOME TAX (MCIT)
Legal Basis Sections 27(E) and 28(A)(2) of the NIRC of 1997, as
amended
What is the MCIT rate Two percent (2%) of the gross income
and base?
Who are covered? Domestic and resident foreign corporations
When Imposed? A corporation starts to be covered by the MCIT
beginning on the fourth (4th) taxable year immediately
following the taxable year in which such corporation
commenced its business operations.

Imposed whenever a corporation has zero or negative

taxable income or whenever the amount of MCIT is
greater than the regular income tax due from such
corporation
Is the imposition of No. It may be suspended corporation sustained
MCIT absolute? substantial losses on account of a prolonged labor
dispute, or because of "force majeure", or because of
legitimate business reverses.
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WITHHOLDING TAX RATES FOR
CORPORATIONS
Non-resident
Domestic Resident Foreign
Type of Income Foreign
Corporation Corporation
Corporation
Dividends - - 30%
Royalties 20% 20% 30%
Interest 20% 20% 30%
Capital Gains 15% 15% 15%

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WHAT IS TAXABLE INCOME?

 The term taxable income means the pertinent

items of gross income specified in the Tax Code,
less the deductions, if any, authorized for such
types of income by the Tax Code or other special
laws. (Section 31, NIRC of 1997, as amended)

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WHAT IS GROSS INCOME?

 Gross Income - means all income derived from

whatever source, including (but not limited to)
the following items:

Compensation for services in whatever form paid,

including, but not limited to fees, salaries, wages,
commissions, and similar items;

Gross income derived from the conduct of trade or

business or the exercise of a profession;

Gains derived from dealings in property;

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WHAT IS GROSS INCOME?

Interests;

Rents;

Royalties;

Dividends;

Annuities;

Prizes and winnings;

Pensions; and

Partner's distributive share from the net income of the general professional
partnership.

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EXCLUSIONS FROM GROSS INCOME
1. Life Insurance;
2. Amount Received by the insured as return of premium;
3. Gifts , bequests, and devises;
4. Compensation for injuries or sickness;
5. Income Exempt under Treaty
6. Retirement benefits, pensions, gratuities, etc.
7. Miscelleaneous items:
a. Income derived by foreign government;
b. Income derived by the government or its political subdivisions;
c. Prices and awards;
d. Prizes and awards in sports competition;
e. 13th month pay and other benefits;
f. GSIS, SSS, Medicare and other contributions;
g. Gains from the sale of bonds, debentures or other certificate of
indebtedness; and
h. Gains from redemption of shares in mutual fund.
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ITEMS NOT DEDUCTIBLE FROM GROSS
INCOME
A. Personal, Living, or Family Expenses.

B. Amounts paid out for new buildings or for permanent

improvements, or betterments made which tend to increase the
value of any property or estate.

C. Amounts spent for restoring property or in making good the

exhaustion thereof for which an allowance is or has been made.

D. Premiums paid on any life insurance policy covering the life of any
officer or employee, or of any person financially interested in any
trade or business carried on by the taxpayer, where the taxpayer is
directly or indirectly a beneficiary under such policy.

E. Losses from sales or exchanges of property under certain

conditions.
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ALLOWABLE DEDUCTIONS FROM
GROSS INCOME
1. Expenses
2. Interests
3. Taxes
4. Losses
5. Bad Debts
6. Depreciation
7. Depletion of Oil Gas Wells and Mines
8. Charitable and Other Contributions
a. Individual – 5% of taxable income
b. Corporation -10% of taxable income
9. Research and Development
10. Pension Trusts

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OPTIONAL STANDARD DEDUCTION

 Individual – 40% of gross sales or receipts.

 Corporation - 40% of gross income

 A taxpayer may opt for the OSD to be deducted from gross

income in lieu of the itemized deductions in arriving at the
taxable income. Individuals opting for the OSD are no longer
required to attach audited financial statements to its annual
income tax return. Such election when made in the return
shall be irrevocable for the taxable year for which the
return is made.

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INDIVIDUAL RETURNS
Who should file Resident/nonresident citizens; and resident/nonresident aliens
What to file Annual Income Tax Return (Form No. 1700;
Annual Income Tax Return (Form 1701);
Real Property Transactions (Form 1706);
and Account Information Form (1701 AIF)
Where to file Authorized Agent Bank; Revenue District Officer; Collection Agent;
or duly authorized Treasurer of the city or municipality
When to file For citizens or aliens, on or before April 1;
For individuals subject to net capital gains from sale or exchange of
shares of stock, within 30 days after each transaction and a final
consolidated return on or before April 15;
For individuals subject to capital gains on sale or disposition of real
property, within 30 days after each sale or other disposition of capital
assets;
Account Information Form (BIR Form 1701 AIF), on or before April
15 of each year covering income for the preceding taxable year.

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ESTATES AND TRUSTS

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ESTATE

• Estate (Inheritance) – all the property, rights,

and obligations of a person which are not
extinguished by his death and also those which
have accrued thereto since the opening of
succession.

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TRUST

• Trust – an arrangement created by will or by

agreement under which title to property is
passed to another for conservation or
investment with the income therefrom and
ultimately the principal to be distributed in
accordance with the directions of the creator as
expressed in the governing instrument.

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ESTATES AND TRUSTS

• Estates and Trusts are considered as individuals

taxable as a separate taxpayer.

• Income of an estate or trust may be taxable to:

 Estate and Trust

 Beneficiary
 Partly to the estate or trust and partly to the
beneficiary (depending upon the disposition
of the income under the will or deed or trust)
 Grantor

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THANK YOU! 