For income tax purposes, taxpayers are classified generally as Individuals, Corporations, Estates and Trusts, Other entities. The classification of the taxpayer is important in determining the applicable tax base in computing the Philippine income tax. The table below shows the primary and secondary classifications of taxpayers.
Individual Taxpayers
As to Residence/Citizenship
Resident Citizen
Resident Citizen is a citizen and whose residence is within the Philippines. Article IV, Section 1 of the Constitution provides that the following are citizens of the Philippines:
- Those who are citizens of the Philippines at the time of the adoption of the 1987 Constitution
- Those whose fathers or mothers are citizens of the Philippines
- Those born before 17 January 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority
- Those who are naturalized in accordance with law
Under BIR Ruling No. 517-2011, personnel employed as full-time staff in the local company where the foreign assignment is considered as part of their duties remains a resident citizen of the Philippines for purposes of income taxation notwithstanding the number of days they stayed abroad.
Non-resident Citizen
A non-resident citizen is a Filipino citizen who:
- Establishes to the satisfaction of the CIR the fact of his physical presence abroad with a definite intention to reside therein
- Leaves the Philippines during the taxable year to reside abroad (as immigrant or for employment on a permanent basis)
- Works and derives income from abroad and whose employment requires him to be present abroad most of the time during the taxable year
- Has been previously considered as a non-resident and arrives in the Philippines at any time during the taxable year to reside here permanently (only with respect to his income from sources abroad until the date of his arrival in the country)
Overseas Contract Worker
Overseas Contract Worker refers to Filipino citizens in foreign countries, who are physically present in a foreign country as a consequence of their employment in that country. Their salaries and wages are paid by an employer abroad and is not borne by an entity or person in the Philippines. They must be duly registered with the Philippine Overseas Employment Administration with valid Overseas Employment Certificate.
Aliens
A resident alien is an individual whose residence is in the Philippines and who is not a Filipino citizen.
A non-resident alien is an individual whose residence and citizenship is not in the Philippines. In general, a non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year shall be deemed a non-resident alien doing business in the Philippines.
As to Type of Income
1. Self-employed. A sole proprietor or an independent contractor who reports income earned from self-employment. He controls who she works for, how the work is done, and when it is done.
2. Professional. A person formally certified by a professional body belonging to a specific profession by virtue of having completed a required examination or course of studies and/or practice, whose competence can usually be measured against an established set of standards.
3. Mixed Income Earner. An individual earning compensation income from employment and income from a business, practice of profession, and/or other sources aside from employment.
4. Compensation Income Earner. Individual whose source of income is purely derived from an employer-employee relationship.
5. Minimum Wage Earner (MWE). Worker in the private sector who is paid with a statutory minimum wage (SMW) rates, or to an employee in the public sector with compensation income of not more than the statutory minimum wage rats in the non-agricultural sector here the worker/employee is assigned. Such statutory wage rates are exempted from income tax. Likewise, the exemption covers the holiday pay, overtime pay, night shift differential pay, and hazard pay earned by MWE.
Corporate Taxpayers
Corporations
Domestic Corporations refers to a corporation created and organized in the Philippines or under its laws (under the law of incorporation test).
Resident Foreign Corporation refers to a corporation organized under the laws of a foreign country, which is engaged in trade or business in the Philippines.
Non-Resident Foreign Corporation refers to a corporation organized under the laws of a foreign country, which is not engaged in trade or business in the Philippines.
Other Entities
Under the Tax Code, the Term Corporation shall include
- Partnership, except (a) General Professional Partnership, (b) Joint venture or consortium formed for the purpose of undertaking construction projects, (c) Joint venture or consortium formed for the purpose of engaging in petroleum, coal, geothermal, and other energy operations pursuant to an operation consortium agreement under a service contract with the Government
- Joint-stock companies
- Joint accounts
- Association
- Insurance companies
A General Professional Partnerships (GPP) is a partnership formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. GPP is not taxable. The partners themselves, not the partnership, shall be liable for income tax in their separate and individual capacities.
A joint venture is a commercial undertaking by two or more persons, but it is different from a partnership in that it involves the disposition of a single lot of goods or the completion of a single project. Essential factors of a joint venture or consortium:
- Each party must make a contribution, not necessarily of capital but by way of services, skill, knowledge, material or money;
- Profits must be shared among the parties;
- There must be a joint proprietary interest and right of mutual control over the subject matter of the enterprise;
- There is a single business transaction.
Joint accounts or cuentas en participation are constituted when one interest himself in the business of another by contributing capital thereto, and sharing in the profits or losses in the proportion agreed upon.
Associations include all organizations with substantially all the salient features of a corporation and are taxable as a corporation.
There is co-ownership whenever the ownership of an undivided thing or right belongs to different persons. Co-ownerships are not subject to tax if the activities of the co-owners are limited to the preservation of the property and the collection of the income therefrom, in which case each co-owner is taxed individually on his distributive share in the income of the co-ownership.
Estates and Trust
In general, income tax imposed on individuals shall apply to income of estates or of any kind of property held in trust, including:
- Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interest and income accumulated or held for future distribution under the terms of the will or trust;
- Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct;
- Income received by estate of deceased persons during the period of administration or settlement of the estate; and
- Income which, in distribution of the fiduciary, may be either distribute to the beneficiaries or accumulated.
Estate refers to all the property, rights and obligations of a person which are not extinguished by his death and those which have accrued thereto since the opening of the succession.
Trust is an arrangement created by will or an agreement under which legal title to property is passed to another for conservation or investment with the income therefrom and ultimately the corpus (principal) to be distributed in accordance with the directions of the creator as expressed in the governing instrument.
General Principles of Income Taxation (Tax Base)
All taxpayers are taxable on all income derived from sources within the Philippines while resident citizens and domestic corporations are taxable also from sources without the Philippines. The Philippines follows the following general principles:
- A resident citizen of the Philippines is taxable on all income derived from sources within and without the Philippines;
- A non-resident 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: Provided, That a seaman shall be treated as an overseas contract worker if he is a: (1) citizen of the Philippines; and (2) receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade
- An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within 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.
We can illustrate the above principles using the below table.
"Income derived from within" means that the income is derived from sources inside the Philippines. "Income derived from without" means that the income is derived from sources outside the Philippines. To know the situs of income, which literally means the place of taxation (or the place where the income is derived), we follow the rules under Section 42, NRIC.
Situs of Income
Situs of income tax refers to the place where income is earned or derived. It determines whether income is derived from sources within the Philippines or without.
Income Within
The following items of gross income shall be treated as gross income from sources within the Philippines:
Interests. Interests derived from sources within the Philippines, and interests on bonds, notes, or other interest-bearing obligation of residents, corporate or otherwise;
Dividends. The amount received as dividends:
- from a domestic corporation; and
- from a foreign corporation, unless less than fifty percent (50%) of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends or for such part of such period as the corporation has been in existence) was derived from sources within the Philippines as determined under the provisions of this Section, but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources.
Services. Compensation for labor or personal services performed in the Philippines;
For example, Mr. J, a Japanese engineer residing in Tokyo, Japan, was contracted by a domestic corporation to assemble in the Philippines equipment it bought in Japan. He started work in Japan and spent 10 days there. The assembling job was completed in the Philippines for another 20 days. He was paid P3,000,000 for his job. How much was the income from the Philippine source?
The income from the Philippine source is P2,000,000 only. The services performed in the Philippines constituted two-third of the entire services or 20 days out of a total of 30 days.
Rentals and royalties. Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals or royalties for
- The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right;
- The use of, or the right to use in the Philippines any industrial, commercial, or scientific equipment;
- The supply of scientific, technical, industrial, or commercial knowledge or information;
- The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c);
- The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery, or other apparatus purchased from such nonresident person;
- Technical advice, assistance, or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project, or scheme; and
- The use of or the right to use: (i) Motion picture films, (ii) Films or videotapes for use in connection with television, and (iii) Tapes for use in connection with radio broadcasting.
Sale of Real Property. Gains, profits, and income from the sale of real property located in the Philippines;
Sale of Personal Property. Gains, profits, and income from the sale of personal property as follows:
- Gains, profits, and income from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived partly from sources within and partly from sources without the Philippines.
- Gains, profits, and the income derived from the purchase of personal property within and its sale without the Philippines, or from the purchase of personal property without and its sale within the Philippines shall be treated as derived entirely from sources within the country in which sold.
- Gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely from sources within the Philippines regardless of where the said shares are sold.
Income Without
Conversely, the following items of gross income shall be treated as income from sources without the Philippines:
- Interests other than those derived from sources within the Philippines;
- Dividends other than those derived from sources within the Philippines;
- Compensation for labor or personal services performed without the Philippines;
- Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties; and
- Gains, profits, and income from the sale of real property located without the Philippines.
