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Income Taxation (Taxpayers and Tax Bases)

Income Taxation

Income Tax is a tax on a person's income, emoluments, profits arising from property, practice of profession,
conduct of trade or business or on the pertinent items of gross income specified in the Tax Code of 1997 (Tax
Code), as amended, less the deductions if any, authorized for such types of income, by the Tax Code, as
amended, or other special laws (BIR, 2018).

Different Classification of Taxpayers

1. Individuals – These are the individual taxpayers with income derived within the territorial jurisdiction of a
taxing authority (Valencia & Roxas, 2016).
a. Citizen – Under Article IV, Section I of the Philippine Constitution, a Filipino Citizen is he who is/has
(Valencia & Roxas, 2016):
i. those who are citizens of the Philippines at the time of the adoption of the 1987 Philippine
Constitution;
ii. born with father and/or mother as Filipino citizens;
iii. born before January 17, 1973 of Filipino mother who elects Philippine citizenship upon reaching the
age of majority; or
iv. acquired Philippine citizenship after birth in accordance with the Philippine laws.
b. Alien – A foreign-born person who is not qualified to acquire Philippine citizenship by birth or after birth
(Valencia & Roxas, 2016).
2. Corporations – In taxation, these include joint stock companies, joint accounts, associations, insurance
companies or partnership no matter how they are created or organized.
3. Estates – Composed of all properties, rights and obligations including those properties, earnings or
obligations that have accrued thereto since the opening of the succession. This is to be transferred from
the decedent to his successors (Valencia & Roxas, 2016).
4. Trust – An obligation imposed or a right to administer over a property given to a person for the benefit of
another. This is a legal institution used to administer funds in behalf of individuals or organizations. Trust
device is frequently used to transfer property from one generation to another (Valencia & Roxas, 2016).
5. Partnership – A contract whereby two (2) or more persons bind themselves to contribute money, property,
or industry to a common fund to engage in profitable activities with the intention of dividing the profits among
themselves (Valencia & Roxas, 2016).

Types of Taxable Individuals

1. Resident Citizen (RC) – A Filipino citizen who stayed permanently in the Philippines or stayed outside the
Philippines for less than 183 days during the taxable years.

They are taxed based on their GLOBAL INCOME. This means that wherever they are, working in abroad
or not, the State imposes the same tax rates prescribed by the Code. They are taxed only on their NET
INCOME. This means that the tax rates would apply only after the deductions and personal exemptions are
already subtracted from their gross income.

2. Non-Resident Citizen (NRC)

a. A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his
physical presence abroad with a definite intention to reside therein.
b. A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either
as an immigrant or for employment on a permanent basis.
c. A citizen of the Philippines who works and derives income from abroad and whose employment thereat
requires him to be physically present abroad most of the time (183 days or more) during the taxable
year.
d. A citizen who has been previously considered as non-resident citizen and who arrives in the Philippines
at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as

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a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income
derived from sources abroad until the date of his arrival in the Philippines.
e. The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to
reside permanently abroad or to return to and reside in the Philippines as the case may be for the
purpose of this section.

3. Resident Alien (RA) – A person who is not a citizen of the Philippines but is residing within the Philippines,
including foreign individuals who have stayed in the Philippines for more than one (1) year from date of
arrival (Valencia & Roxas, 2016).
a. An alien who is not a mere transient or sojourner.
b. An alien who comes to the country for a definite purpose, which, by its nature, would require an
extended stay making his home temporarily in the Philippines.
c. An alien who comes to the country without a definite intention as to his stay.

4. Non-Resident Alien (NRA) – An individual whose residence is not within the Philippines and who is not a
citizen thereof.
a. Non-Resident Alien Engaged in Trade or Business (NRAETB) – An individual who shall come to the
Philippines and stay therein for an aggregate period of more than 180 days
b. Non-Resident Alien Not Engaged in Trade or Business (NRANETB) – An individual who is not a citizen
nor a resident and his stay does not exceed 180 days during the calendar year, and has no business
income derived within the Philippines.

5. Special Taxpayers - An individual holding a managerial and/or technical positions employed by Regional
or Area Headquarters, Regional Operating Headquarters of Multinational Companies, Offshore Banking
Units, and petroleum contractors and subcontractors.

1997 Tax Code 15% preferential tax rate based on gross compensation income
- Provision of 15% preferential rate will be retained for alien employees and
Filipino employees occupying the same position employed by RHQs, ROHQs,
R.A. No. 10963 OBUs, and petroleum service contractors and subcontractors.
(TRAIN Law) - 15% preferential rate shall not be applicable to RHQs, ROHQs, OBUs, and
(SyCip Gorres petroleum service contractors and subcontractors registered with the Securities
Velayo & Co., and Exchange Commission (SEC) after January 01, 2018.
2018) - Existing RHQs, ROHQs, OBUs, and petroleum service contractors and
subcontractors for qualified employees shall continue to avail of the preferential
tax rate for present and future qualified employees (Vetoed by the President).

Individual Tax Situs

Based on the law on Philippine Income Taxation, resident citizens are taxable for income derived from sources
within and without the Philippines. All income of other individual taxpayers is taxable only for income derived
within the Philippines.

Types of Taxable Corporations

1. Domestic Corporations – A corporation created or organized under the Philippine laws.

2. Resident Foreign Corporations – Foreign corporations engaged in trade or business within the
Philippines.
3. Non-Resident Foreign Corporations – Foreign corporations not engaged in trade or business within the
Philippines.
4. Special Corporations
a. Domestic Corporations
i. Proprietary Educational Institutions
ii. Non-profit Hospitals
b. Resident Foreign Corporations

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i. International Carriers
ii. Offshore Banking Units (OBUs)
iii. Regional Operating Headquarters (ROHQs)
c. Non-Resident Foreign Corporations
i. Non-resident cinematographic film owner, lessor, or distributor
ii. Non-resident owner or lessor of vessels chartered by Philippine Nationals
iii. Non-resident owner or lessor or aircraft, machinery, and other equipment

Exempt Corporations

Under Sec. 30 of the Tax Code, the following shall not be subject to income tax (Bureau of Internal Revenue,
2018):
a. Labor, an agricultural or horticultural organization not organized principally for profit;
b. Mutual savings bank not having a capital stock represented by shares and cooperative bank without capital
stock organized and operated for mutual purposes and without profit;
c. A beneficiary society, order or association, operating for the exclusive benefit of the members such as a
fraternal organization operating under the lodge system, or mutual aid association or a nonstock corporation
organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively
to the members of such society, order, or association, or nonstock corporation or their dependents;
d. Cemetery company owned and operated exclusively for the benefit of its members;
e. Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall
belong to or inure to the benefit of any member, organizer, officer or any specific person;
f. Business league chamber of commerce, or board of trade, not organized for profit and no part of the net
income of which inures to the benefit of any private stockholder, or individual;
g. Civic league or organization not organized for profit but operated exclusively for the promotion of social
welfare;
h. A nonstock and nonprofit educational institution;
i. Government educational institution;
j. Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or
cooperative telephone company, or like the organization of a purely local character, the income of which
consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its
expenses; and
k. Farmers', fruit growers', or like association organized and operated as a sales agent to market the products
of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the
basis of the quantity of produce finished by them;

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the
preceding organizations from any of their properties, real or personal, or from any of their activities conducted
for profit regardless of the disposition made of such income, shall be subject to the tax imposed under this Code.

Corporate Tax Situs

Based on the law on Philippine Income Taxation, domestic corporations are taxable for income derived from
sources within and without the Philippines. All income of other corporate taxpayers is taxable only for income
derived within the Philippines.

Estates and Trusts

Estates

Revenue Regulations No. 12-2018 issued on March 15, 2018 consolidates the rules governing the imposition
and payment of the Estate and Donor’s Tax incorporating the provisions of the Tax Reform for Acceleration
and Inclusion (TRAIN) Law, particularly the provisions in Chapters I and II of Title III of the National Internal

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Revenue Code (NIRC), thereby repealing Revenue Regulations (RR) No. 2-2003, as amended (BIR, Tax
Reform for Acceleration and Inclusion (TRAIN), 2018).

The net estate of every decedent, whether resident or non-resident of the Philippines, as determined by the
NIRC, shall be subject to an Estate Tax at the rate of six percent (6%) (BIR, Tax Reform for Acceleration and
Inclusion (TRAIN), 2018).

The Estate Tax accrues as of the death of the decedent, and the accrual of the tax is distinct from the obligation
to pay the same. Upon the death of the decedent, succession takes place and the right of the State to tax the
privilege to transmit the estate vests instantly upon death. Accordingly, the tax rates and procedures prescribed
under the Regulations shall govern the estate of a decedent who died on or after the effectivity date of the
TRAIN Law (BIR, Tax Reform for Acceleration and Inclusion (TRAIN), 2018).

Trust is a right to the property, held by one person for the benefit of another (De Vera, 2018).
a. Trustor - one who establishes a trust.
b. Trustee - one in whom confidence is rested (in regards to properties) for the benefit of the other person.

Types of Partnerships

a. General Professional Partnerships (GPP) – A type of partnership formed to exercise the common
profession and no part of the income of which is derived from engaging in any trade or business (De Vera,
2018).
b. General Co-Partnership (Compania-Colectiva) – A partnership wherein part or all of its income is derived
from the conduct of trade or business (Valencia & Roxas, 2016).
c. General Professional Partnership Engaged in Commercial Activity – To be nontaxable, a GPP should
be for the sole purpose of exercising the partners’ common profession. If the GPP is engaged in a trade or
business other than the practice of the partner’s common profession, it becomes taxable as a corporation
(Valencia & Roxas, 2016).

References:
Bureau of Internal Revenue. (2018, August 31). Guide to Philippines tax law research. Retrieved from Bureau
of Internal Revenue: https://www.bir.gov.ph
Bureau of Internal Revenue. (2018). Tax code. Retrieved from Bureau of Internal Revenue: www.bir.gov.ph
De Leon, H. S. & De Leon, H. M. (2016). The law on income taxation. Quezon City: REX Printing Company,
Inc.
De Vera, J. L. (2018). Quicknotes in taxation. Manila: GIC Enterprises & Co.,Inc.
Department of Finance. (2018, August 31). Tax 101. Retrieved from Department of FInance:
http://www.dof.gov.ph
Hoffman, W. H. & Smith, J. E. (2014). Individual income taxes. Mason: Cengage Learning.
Tabag, E. D. (2018). CPA reviewer in taxation. Manila: Professional Review and Training Center.
Valencia, E. G. & Roxas, G. F. (2016). Income taxation. Baguio City: Valencia Educational Supply.

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