Philippines: Taxation of Individuals Under the National Internal Revenue Code of the Phillippines

Last Updated: 13 November 2001
Article by Regulus E Cabote

The following is a summary of the taxes imposed on the incomes received by individuals as provided in the Philippine National Internal Revenue Code ("Phil Tax Code"). Bear in mind, however, a tax treaty may exist which would provide or allow preferential tax treatment for incomes received by aliens. Presently, the Philippines has tax treaties with 29 countries, namely, Australia, Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Hungary, India, Indonesia, Israel, Italy, Japan, Korea, Malaysia, Netherlands, New Zealand, Norway, Pakistan, Romania, Russia, Singapore, Spain, Sweden, Thailand, UK and U.S.A.

Under the Phil Tax Code, the individuals subject to Philippine taxation are:

    1. Resident Citizens
    2. Non-resident Citizens
    3. Resident Aliens
    4. Non-resident Aliens Taxation of Resident Citizens

A Philippine citizen and resident is taxed on all income derived from sources within and without the Philippines.

The income tax is imposed on his/her taxable income (that is, gross income less allowable deductions and/or personal exemptions) computed in accordance with the following schedule:

Not over P10,000

5%

 

Over P10,000

P500+

10% of the excess over P10,000

Over P30,000 but not over P70,000

P2,500+

15% of the excess over P30,000

Over P70,000 but not over P140,000

P8,500 +

20% of the excess over P70,000

Over P140,000 but not over P250,000

P22,500 +

25% of the excess over P140,000

Over P250,000 but not over P500,000

P50,000 +

30% of the excess over P250,000

Over P500,000

P125,000 +

32% of the excess over P500,000

However, the following incomes shall be subject to a final tax (on the gross amount) as follows:

  1. Interests from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements - 20%.
  2. However, interest income received (except if received by a non-resident) from a depository bank under the expanded foreign currency deposit system shall be subject to final tax at 7 1/2% of such interest income.

    Furthermore, interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas shall be exempt, provided that should the holder of the certificate pre-terminate the deposit or investment before the 5th year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: 4 years to less than 5 years - 5%; 3 years to less than 4 years - 12%; and less than 3 years - 20%.

  3. Royalties - 20%.
  4. However, royalties on books, as well as other literary works and musical compositions, which shall be taxed at a reduced rate of ten percent (10%).

  5. Prizes and winnings from sources within the Philippines - 20%.
  6. However, prizes amounting to P10,000 or less shall be declared as part of the income subject to the schedular tax rates.

  7. Cash/and/or property dividends from a domestic corporation or joint stock company, or insurance or mutual fund company and regional operating headquarter of a multinational company, or share in the distributable net income after tax of a partnership (except a general professional partnership), joint account, joint venture or consortium - 10%.
  8. Capital gains from sale of shares of stock not traded in the stock exchange - Not over P100,000 - 5%, and, on any amount in excess of P100,000 - 10%.
  9. Capital Gains from Sale of Real Property located in the Philippines and classified as a capital asset - 6% based on the gross selling price or current fair market value as determined by the Philippine tax authority, whichever is higher.

Taxation of Non-Resident Citizens

A non-resident citizen is taxed in the same manner as a resident citizen but only for his/her income derived from sources within the Philippines.

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 during the taxable year shall be considered a non-resident citizen. An overseas contract worker as well as a Filipino seaman who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade, are considered non-resident citizens. A citizen who has been previously considered as a nonresident 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 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.

Taxation of Resident Aliens

An alien who resides in the Philippines is subject to Philippine tax on his/her income derived from sources within the Philippines and such income is taxed in the same manner as the income of a Philippine citizen.

Taxation of Nonresident Alien Individuals

A non-resident alien is taxed on income derived from sources within the Philippines.

A non-resident alien is considered either as engaged in trade or business within the Philippines or not engaged in trade or business within the Philippines.

A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a nonresident alien engaged in business in the Philippines.

A nonresident alien individual engaged in trade or business in the Philippines shall be subject to income tax in the same manner as a citizen and a resident alien, on taxable income received from all sources within the Philippines except on the following items of income which shall be subject to final tax (on the gross amount):

  1. Cash and/or property dividends from a domestic corporation, joint stock company, insurance or mutual fund company or regional operating headquarter of a multinational company, or share in the distributable set income of a partnership (except a general professional partnership), joint account, joint venture taxable as a corporation or association of which he is a member or co-venturer - 20%.
  2. Interests - 20%.
  3. However, interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas shall be exempt, provided that should the holder of the certificate pre-terminate the deposit or investment before the 5th year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: 4 years to less than 5 years - 5%; 3 years to less than 4 years - 12%; and less than three (3) years - 20%.

  4. Royalties - 20%.
  5. However, royalties on books as well as other literary works, and royalties on musical compositions shall be subject to a final tax of 10%.

  6. Prizes and Other Winnings — 20%.
  7. However, prizes amounting to P10,000 or less shall be subject to the schedular tax rates.

  8. Capital gains from sale of shares of stock not traded in the stock exchange - Not over P100,000 - 5%, and, on any amount in excess of P100,000 - 10%.
  9. Capital Gains from Sale of Real Property located in the Philippines and classified as a capital asset - 6% based on the gross selling price or current fair market value as determined by the Philippine tax authority, whichever is higher.

A non-resident alien not engaged in trade or business within the Philippines shall be subject to 25% tax on the gross amount of incomes derived from the Philippines except the following incomes which shall be subject to final tax:

  1. Capital gains from sale of shares of stock not traded in the stock exchange - Not over P100,000 - 5%, and, on any amount in excess of P100,000 - 10%.
  2. Capital Gains from Sale of Real Property located in the Philippines and classified as a capital asset - 6% based on the gross selling price or current fair market value as determined by the Philippine tax authority, whichever is higher.

Taxation of Certain Alien Employees

Certain alien employees are subject to 15% tax on their gross compensation income, as follows:

  1. For alien individuals employed by regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies, their salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional operating headquarters shall be taxed at 15% of such gross income.
  2. For alien individuals employed by offshore banking units established in the Philippines, their salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such offshore banking units, shall be taxed at 15% of such gross income.
  3. For alien individuals employed by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines, their salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor shall be taxed at 15% of such gross income.

Any other income earned from all sources within the Philippines by the alien employees referred to above shall be subject to the pertinent income tax, as the case may be, imposed under the Phil Tax Code.

"The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances."

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Authors
Regulus E Cabote
 
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