Income taxation and tax rates in the Philippines
April 25, 2011
Year after year, April 15 is a date millions of Filipinos dread. It is because this date is the annual deadline to file income tax returns.
If you were able to make your own Income Tax Return (ITR) because you fully understand Philippine taxation laws, then good for you. But for the majority who rely on accountants or their companies to prepare their ITRs, here is a simple and concise explanation of the income tax law in the Philippines.
Who are required to file Income Tax Returns (ITR)?
According to the Bureau of Internal Revenue (BIR), the following are required to submit Income Tax Returns:
- Filipino citizens residing in the Philippines receiving income from sources within or outside the Philippines
- Filipino citizens not residing in the Philippines receiving income from sources within the Philippines
- Resident or non-resident aliens receiving income from sources within the Philippines
- Domestic corporations receiving income from sources within and outside the Philippines
- Foreign corporations receiving income from sources within the Philippines
- Taxable partnerships
- Estates and trusts engaged in trade or business
What is Taxable Income?
Taxable income is the gross income of the taxpayer less any deductions and/or personal and additional exemptions authorized by the Tax Code or other special laws.
Gross income means all income derived from whatever source. It includes, but is not limited to, Compensation for services, in whatever form paid; Gross income derived from the conduct of trade or business or the exercise of profession; Gains derived from dealings in propert; Interest; Rents; Royalties; Dividends; Annuities; Prizes and winnings; Pensions; and Partner’s distributive share from the net income of the general professional partnerships.
Exclusions from Gross Income include Life insurance; Amount received by insured as return of premiu; Gifts, bequests and devise; Compensation for injuries or sickness; Income exempt under treaty; Retirement benefits, pensions, gratuities, etc; Miscellaneous item; income derived by foreign government; income derived by the government or its political subdivision; prizes and awards in sport competition; prizes and awards which met the conditions set in the Tax Code; 13th month pay and other benefits; GSIS, SSS, Medicare and other contributions; gain from the sale of bonds, debentures or other certificate of indebtedness; and gain from redemption of shares in mutual fund.
What are the allowable deductions from gross income?
Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationships, a taxpayer may opt to avail either of the following allowable deductions from gross income:
- Optional Standard Deduction – an amount not exceeding 40% of the net sales for individuals and gross income for corporations; or
- Itemized Deductions – which include the following: Expenses; Interest; Taxes; Losses; Bad Debts; Depreciation; Depletion of Oil and Gas Wells and Mines; Charitable Contributions and Other Contributions; Research and Development; and Pension Trusts
A maximum of P2,400 premium payments on health and/or hospitalization insurance may also be claimed as deduction, provided the annual family gross income is not be more than P250,000 and for married individuals, the spouse claiming this deduction is the one claiming additional exemptions for the qualified dependents.
What are the allowable personal and additional exemptions?
Individuals who are earning compensation income, engaged in business or deriving income from the practice of profession are entitled to the following Personal Exemptions:
- For single individual or married individual judicially decreed as legally separated with no qualified dependents – P50,000
- For head of family – P50,000
- For each married individual – P50,000 (to be claimed only by the spouse deriving gross income)
Taxpayers may also claim an Additional Exemption of P25,000 for each qualified dependents, up to four (4) dependents.
How is income tax payable computed?
The formula to compute the income tax payable is:
- Gross Income
- Less: Allowable Deductions (Itemized or Optional)
- Net Income
- Less: Personal & Additional Exemptions
- Net Taxable Income
- Applicable Tax Rate (see Tax Rate Table below)
- Income Tax Due
- Less: Tax Withheld
- Income Tax Payable
What is the income tax rate in the Philippines?
For individuals earning purely compensation income and those engaged in business and practice of profession, the applicable tax rate table is as follows:
|More than||But less than|
|P10,000||P30,000||P500 + 10% of the Excess over P10,000|
|P30,000||P70,000||P2,500 + 15% of the Excess over P30,000|
|P70,000||P140,000||P8,500 + 20% of the Excess over P70,000|
|P140,000||P250,000||P22,500 + 25% of the Excess over P140,000|
|P250,000||P500,000||P50,000 + 30% of the Excess over P250,000|
|P500,000||P125,000 + 32% of the Excess over P500,000 in 2000 and onward|
For domestic corporations, the corporate tax rate is 30% of the Net taxable income from all sources starting January 1, 2009.
For proprietary educational institutions and non-stock, non-profit hospitals, the tax rate is 10% of the Net taxable income, provided that the gross income from unrelated trade, business or other activity does not exceed 50% of the total gross income.
For GOCCs, agencies & instrumentalities, the tax rate is 32% of the Net taxable income from all sources.
For all taxable partnerships, the tax rate is also 32% of the Net taxable income from all sources.
International Carriers are taxed 2.5% on their Gross Philippine Billings.
For Regional Operating Headquarters (ROHQ), the tax rate is 10% of Taxable Income.
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