What are income tax rates in the Philippines?

by adminAugust 24, 20210 Comments

  1. For Individual Citizens and Resident Aliens Earning Purely Compensation Income and Individuals Engaged in Business and Practice of Profession

    1. Graduated Income Tax Rates under Section 24(A)(2) of the Tax Code of 1997, as amended by Republic Act No. 10963 

      Amount of Net Taxable Income Rate
      Over But Not Over  
      - P250,000 0%
      P250,000 P400,000 20% of the excess over P250,000
      P400,000 P800,000 P30,000 + 25% of the excess over P400,000
      P800,000 P2,000,000 P130,000 + 30% of the excess over P800,000
      P2,000,000 P8,000,000 P490,000 + 32% of the excess over P2,000,000
      P8,000,000   P2,410,000 + 35% of the excess over P8,000,000

    2. For Purely Self-Employed Individuals and/or Professionals Whose Gross Sales/Receipts and Other Non-Operating Income Do Not Exceed the VAT Threshold of P3,000,000, the tax shall be, at the taxpayer’s option:

      1. 8% Income Tax on Gross Sales or Gross Receipts in Excess of P250,000 in Lieu of the Graduated Income Tax Rates and the Percentage Tax; Or

      2. Income Tax Based on the Graduated Income Tax Rates

    3. For Individuals Earning Both Compensation Income and Income from Business and/or Practice of Profession, their income taxes shall be:

      1. For Income from Compensation: Based on Graduated Income Tax Rates; and

      2. For Income from Business and/or Practice of Profession:

        1. If the total Gross Sales/Receipts Do Not Exceed VAT Threshold of P3,000,000, the Individual Taxpayer May Opt to Avail:

          1. 8% Income Tax on Gross Sales/Receipts and Other Non-Operating Income in Lieu of the Graduated Income Tax Rates and the Percentage Tax; Or

          2. Income Tax Based on Graduated Income Tax Rates

        2. If the total Gross Sales/Receipts Exceed VAT Threshold of P3,000,000

          1. Income Tax Based on Graduated Income Tax Rates

    4. On Certain Passive Income of Individual Citizens and Resident Aliens

      Passive Income Tax Rate
      1. Interest from currency deposits, trust funds and deposit substitutes 20%
      2. Royalties (on books as well as literary & musical compositions) 10%
          - In general 20%
      3. Prizes (P10,000 or less ) Graduated Income Tax Rates
          - Over P10,000 20%
      4. Winnings (except from PCSO and Lotto amounting to P10,000 or less ) 20%
      -   From PCSO and Lotto amounting to P10,000 or less exempt
      5. Interest Income from a Depository Bank under the Expanded Foreign Currency Deposit System 15%
      6. Cash and/or Property Dividends received by an individual from a domestic corporation/ joint stock company/ insurance or mutual fund companies/ Regional Operating Headquarter of multinational companies  10%
      7. Share of an individual in the distributable net income after tax of a partnership (except GPPs)/ association, a joint account, a joint venture or consortium taxable as corporation of which he is a member or co-venture 10%
      8. Capital gains from sale, exchange or other disposition of real property located in the Philippines, classified as capital asset 6%
      9. Net Capital gains from sale of shares of stock not traded in the stock exchange 15% 

      10. 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 (BSP)

      Upon pre-termination before the fifth year, there should be imposed on the entire income from the proceeds of the long-term deposit based on the remaining maturity thereof:

      Holding Period

      		 Exempt
      - Four (4) years to less than five (5) years 5%
      - Three (3) years to less than four (4) years 12%
      - Less than three (3) years 20%

  2. For Non-Resident Aliens Not Engaged in Trade or Business 

    A. Tax Rate in General – on taxable income from all sources within the Philippines same manner as individual citizen and resident alien individual
    B. Certain Passive Income Tax Rates
    1. Interest from currency deposits, trust funds and deposit substitutes 20%
    2. Royalties (on books as well as literary & musical compositions) 10%
        - In general 20%
    3. Prizes (P10,000 or less ) Graduated Income Tax Rates
        - Over P10,000 20%
    4. Winnings (except from PCSO and Lotto) 20%
       -  From PCSO and Lotto exempt
    5. Cash and/or Property Dividends received from a domestic corporation/ joint stock company/ insurance/ mutual fund companies/ Regional Operating Headquarter of multinational companies 20%
    6. Share of a non-resident alien individual in the distributable net income after tax of a partnership (except GPPs) of which he is a partner or from an association, a joint account, a joint venture or consortium taxable as corporation of which he is a member or co-venture 20%

    7. 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 (BSP)

    Upon pre-termination before the fifth year, there should be imposed on the entire income from the proceeds of the long-term deposit based on the remaining maturity thereof:

    Holding Period

    		 Exempt
      - Four (4) years to less than five (5) years 5%
      - Three (3) years to less than four (4) years 12%
      - Less than three (3) years 20%
    8. Capital from the sale, exchange or other disposition of real property located in the Philippines classified as capital asset 6%
    9. Net Capital gains from sale of shares of stock not traded in the Stock Exchange  
       - Not over P100,000 5%
       - Any amount in excess of P100,000 10%

  3. For Non-resident Aliens Not Engaged in Trade or Business 

    1. Gross amount of income derived from all sources within the Philippines 25%
    2. Capital gains from the exchange or other disposition of real property located in the Philippines 6%
    3. Net Capital gains from the sale of shares of stock not traded in the Stock Exchange  
    - Not  Over  P100,000 5%
    - Any amount in excess of P100,000 10%

  4. For Alien Individuals Employed by Regional Headquarters (RHQ) or Area Headquarters and Regional Operating Headquarters (ROH) of Multinational Companies, Offshore Banking Units (OBUs), Petroleum Service Contractor and Subcontractor  

    On the gross income consisting of salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and emoluments derived from the Philippines Graduated Income Tax Rates

  5. For General Professional Partnerships 

    Net Income of the Partnerships 0%

  6. For Domestic Corporations 

    Rates of Tax on Certain Passive Income of Corporations Tax Rate
    1. Interest from currency deposits, trust funds, deposit substitutes and similar arrangements received by domestic corporations 20%
    2. Royalties from sources within the Philippines 20%
    3. Interest Income from a Depository Bank under Expanded Foreign Currency Deposit System 15%
    4. Cash and Property Dividends received by a domestic corporation from another domestic corporation 0%
    5. Capital gains from the sale, exchange or other disposition of lands and/or building 6%
    6. Net Capital gains from sale of shares of stock not traded in the stock exchange 15% 
    *Beginning on the 4th year immediately following the year in which such corporation commenced its business operations, when the minimum corporate income tax is greater than the tax computed using the normal income tax.

  7. For Resident Foreign Corporation 

    1) a. In General – on taxable income derived from sources within the Philippines 30%
        b. Minimum Corporate Income Tax – on gross income 2%
        c. Improperly Accumulated Earnings – on improperly accumulated taxable income 10%
    2) International Carriers – on gross Philippine billings 2 ½ %
    3) Regional Operating Headquarters of Multinational Companies– on taxable income 10%
    4.) Regional or Area Headquarters of Multinational Companies exempt
    5) Corporation Covered by Special Laws Rate specified under the respective special laws
    6) Offshore Banking Units (OBUs) 10%
    In general – Income derived by OBUs from foreign currency transactions with non-residents, other OBUs, local commercial banks and branches of foreign banks authorized by BSP Exempt
        On interest income derived from foreign currency loans granted to residents other than offshore banking units or local commercial banks, local branches of foreign banks authorized by BSP to transact business with OBUs 10%
    7) Income derived under the Expanded Foreign Currency Deposit System  
       Interest income derived by a depository bank under the expanded foreign currency deposit system. 7 ½ %
       On Income derived by depository banks under the expanded foreign currency deposit systems from foreign currency transactions with non-residents, OBUs in the Philippines, local commercial banks including branches of foreign banks that may be authorized by BSP exempt
        On interest income derived from foreign currency loans granted by depository banks under the expanded foreign currency deposit systems to residents other than offshore banking units in the Philippines or other depository banks under the expanded system 10%
    8.) Branch Profit Remittances – on total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippines Economic Zone Authority) 15%
    9.) Interest from currency deposits, trust funds, deposit substitutes and similar arrangements 20%
    10. Royalties derived from sources within the Philippines 20%

Related Revenue Issuances

RMO No. 23-2018, RR No. 8-2018, RA No. 10963, RR No. 12-2007, RR No. 14-2002, RA No. 9337, RR No. 9-98, RR No. 1-98, RR No. 5-97, RR No. 4-96

 Frequently Asked Questions

1) What is income?

Income means all wealth which flows into the taxpayer other than as a mere return of capital.

2) What is Taxable Income?

Taxable income means the pertinent items of gross income specified in the Tax Code as amended, less the deductions, if any, authorized for such types of income, by the Tax Code or other special laws.

3) What is Gross Income?

Gross income means all income derived from whatever source.

4) What comprises gross income?

Gross income includes, but is not limited to the following:

  • 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 profession
  • Gains derived from dealings in property
  • Interest
  • Rents
  • Royalties
  • Dividends
  • Annuities
  • Prizes and winnings
  • Pensions
  • Partner's distributive share from the net income of the general professional partnerships

5) What are some of the exclusions from gross income?

    • Life insurance
    • Amount received by insured as return of premium
    • Gifts, bequests and devises
    • Compensation for injuries or sickness
    • Income exempt under treaty
    • Retirement benefits, pensions, gratuities, etc.
    • Miscellaneous items
  • 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 not exceeding P90,000
  • GSIS, SSS, Medicare and other contributions
  • Gains from the sale of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years
  • Gains from redemption of shares in mutual fund

6) What are the allowable deductions from gross income?

a)  *Optional Standard Deduction - an amount not exceeding 40% of the gross sales/receipts for individuals and gross income for corporations; or

b)  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
- Pension Trusts
* Not allowed to non-resident alien individual
* A General Professional Partnership (GPP) may avail of the OSD only once, either by the GPP or the partners comprising the partnership

7) Who are not required to file Income Tax returns?

a. An individual earning purely compensation income whose taxable income does not exceed P250,000.00

b. An individual whose income tax has been withheld correctly by his employer, provided that such individual has only one employer for the taxable year

c. An individual whose sole income has been subjected to final withholding tax or who is exempt from income tax pursuant to the Tax Code and other special laws.

d. An individual who is a minimum wage earner

e. Those who are qualified under “substituted filing”. However, substituted filing applies only if all of the following requirements are present:

- the employee received purely compensation income (regardless of amount) during the taxable year;
- the employee received the income from only one employer in the Philippines during the taxable year;
- the amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer;
- the employee’s spouse also complies with all 3 conditions stated above;
- the employer files the annual information return (BIR Form No. 1604-CF); and
- the employer issues BIR Form No. 2316 (Oct 2002 ENCS version) to each employee.

8.) Who are exempt from Income Tax?

a. Income from abroad of a non-resident citizen who is:

i. 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

ii. 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

iii. 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

iv. A citizen who has been previously considered as a non-resident citizen and who arrives in the Philippines at any time during the year to reside permanently in the Philippines will likewise be treated as a non-resident citizen during 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.

b. Overseas Filipino Worker, including overseas seaman

An individual citizen of the Philippines who is working and deriving income from abroad as an overseas Filipino worker is taxable only on income from sources within the Philippines; provided, that a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade will be treated as an overseas Filipino worker.

NOTE: A Filipino employed as Philippine Embassy/Consulate service personnel of the Philippine Embassy/consulate is not treated as a non-resident citizen; hence, his income is taxable.

c. General Professional Partnership

d. Government Service Insurance System (GSIS)

e. Social Security System (SSS)

f. Philippine Health Insurance Corporation (PHIC)

g. Local Water Districts (LWD)

9) What are the procedures in filing Income Tax returns (ITRs)?

a. For “with payment” ITRs (BIR Form Nos. 1700 / 1701 / 1701Q / 1702 / 1702Q / 1704)

File the return in triplicate (two copies for the BIR and one copy for the taxpayer) with the Authorized Agent Bank (AAB) of the place where taxpayer is registered or required to be registered. In places where there are no AABs, file the return directly with the Revenue Collection Officer or duly Authorized Treasurer of the city or municipality in which such person has his legal residence or principal place of business in the Philippines, or if there is none, filing of the return will be at the Office of the Commissioner.

b. For “no payment” ITRs -- refundable, break-even, exempt and no operation/transaction, including returns to be paid on 2nd installment and returns paid through a Tax Debit Memo(TDM)

File the return with the concerned Revenue District Office (RDO) where the taxpayer is registered. However, "no payment" returns filed late shall not be accepted by the RDO but instead, they shall be filed with an Authorized Agent Bank (AAB) or Collection Officer/Deputized Municipal Treasurer (in places where there are no AABs), for collection of necessary penalties.

10) How is Income Tax payable of individuals (resident citizens and non-resident citizens) computed?

A. Based on Graduated Income Tax Rate

Gross Income P ___________
Less: Allowable Deductions (Itemized or Optional) ___________
Net Taxable Income P ___________
Multiply by Tax Rate (0% to 35%) ____________
Income Tax Due P ___________
Less: Tax Withheld (per BIR From 2316) ____________
Income Tax Payable P____________

B. Based on Preferential Tax Rate of 8%

i. Taxpayers source of income is purely from self-employment

Gross Sales/Receipts P ___________
Add: Non-operating Income ____________
Gross Taxable Income P ___________
Less: Amount allowed as deduction under Sec. 24 (A)(2)(b) of NIRC, as amended      250,000.00
Net Taxable Income P ___________
Multiply by Tax Rate                   8%
Income Tax Due P ___________
Tax Withheld (per BIR From 2307) ____________
Income Tax Payable P ___________

 ii. Mixed Income Earner

On Compensation  
Total Compensation Income P ___________
Less: Non-taxable Income ____________ 
          13th month pay and other benefits (max)         90,000.00
Taxable Compensation Income P ----------------
Multiply by Tax Rate (0% to 35%) ____________ 
Tax Due on Compensation P ___________
   
On Business Income  
Gross Sales/Receipts P ___________
Add: Non-operating Income ____________
Taxable Business Income P ___________
Multiply by Tax Rate                   8%
Tax Due on Business Income P ___________
   
Total Income Tax Due (Compensation + Business) P ___________
Tax Withheld (per BIR From 2316/2307) ____________
Income Tax Payable P ___________

11) How is Income Tax Paid?

A. Through withholding 

a. Individual Payee: Rate
If the gross annual business or professional income did not exceed P3,000,000.00 5%
If the gross annual business or professional income is more than P3,000,000.00 10%
b. Non-individual Payee Rate
If the gross annual business or professional income did not exceed P720,000.00 10%
If the gross annual business or professional income is more than P720,000.00 15%

B. Pay the balance as you file the tax return, computed as follows:

Income Tax Due P ___________
Less: Withholding Tax ___________
Net Income Tax Due* P ___________

*Note: When the tax due exceeds P2,000.00, the taxpayer may elect to pay in two equal installments, the first installment to shall be paid at the time the return is filed and the second installment on or before October 15 following the close of the calendar year to the Authorized Agent Bank (AAB) within the jurisdiction of the Revenue District Office (RDO) where the taxpayer is registered

12) Is the Minimum Corporate Income Tax (MCIT) an addition to the regular or normal income tax?

No, the MCIT is not an additional tax. An MCIT of 2% of the gross income as of the end of taxable year (whether calendar or fiscal year, depending on the accounting period employed) is imposed on a corporation taxable under Title II of the Tax Code, as amended, beginning on the 4th taxable year immediately following the taxable year in which such corporation commenced its business operations when the MCIT is greater than the regular income tax.  The MCIT is compared with the regular income tax, which is due from a corporation. If the regular income is higher than the MCIT, then the corporation does not pay the MCIT but the amount of the regular income tax.

13) Who are covered by MCIT?

The MCIT covers domestic and resident foreign corporations which are subject to the regular income tax. The term “regular income tax” refers to the regular income tax rates under the Tax Code. Thus, corporations which are subject to a special corporate tax or to preferential rates under special laws do not fall within the coverage of the MCIT.

For corporations whose operations or activities are partly covered by the regular income tax and partly covered by the preferential rate under special law, the MCIT shall apply the regular income tax rate on its operations not covered by the tax incentives. Newly established corporations or firms which are on their first 3 years of operations are not covered by the MCIT.

14) When does a corporation start to be covered by the MCIT?

A corporation starts to be covered by the MCIT on the 4th year following the year of the commencement of its business operations. The period of reckoning which is the start of its business operations is the year when the corporation was registered with the BIR. This rule will apply regardless of whether the corporation is using the calendar year or fiscal year as its taxable year.

15) When is the MCIT reported and paid? Is it quarterly?

The MCIT is paid on an annual basis and quarterly basis. The rules are governed by Revenue Regulations No. 12-2007.

16) How is MCIT computed?

The MCIT is 2% of the gross income of the corporation at the end of the taxable year.

The computation and the payment of MCIT, shall likewise apply at the time of filing the quarterly corporate income tax as prescribed under Section 75 and Section 77 of the Tax Code, as amended.  Thus, in the computation of the tax due for the taxable quarter, if the computed quarterly MCIT is higher than the quarterly normal income tax, the tax due to be paid for such taxable quarter at the time of filing the quarterly income tax return shall be the MCIT which is two percent (2%) of the gross income as of the end of the taxable quarter.

“Gross income” means gross sales less sales returns, discounts and cost of goods sold. Passive income, which have been subject to a final tax at source do not form part of gross income for purposes of computing the MCIT.

Cost of goods sold includes all business expenses directly incurred to produce the merchandise to bring them to their present location and use.

For trading or merchandising concern, cost of goods sold means the invoice cost of goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold, including insurance while the goods are in transit.

For a manufacturing concern, cost of goods manufactured and sold means all costs of production of finished goods such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.

For sale of services, gross income means gross receipts less discounts and cost of services which cover all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including:

    • Salaries and employees benefits of personnel, consultants and specialists directly rendering the service;
    • Cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used;
    • Cost of supplies

Interest Expense is not included as part of cost of service, except in the case of banks and other financial institutions.

“Gross Receipts” means amounts actually or constructively received during the taxable year. However, for taxpayers employing the accrual basis of accounting, it means amounts earned as gross income.

17) What is the carry forward provision under the MCIT?

Any excess of the MCIT over the normal income tax may be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years.

18) How would the MCIT be recorded for accounting purposes?

Any amount paid as excess minimum corporate income tax should be recorded in the corporation’s books as an asset under account title “Deferred charges-MCIT”

19) How long can we amend our income tax return?

There is no prescription period for amending the return. When the taxpayer has been issued a Letter of Authority, he can no longer amend the return.

20) Can a benefactor of a senior citizen claim him/her as additional dependent in addition to his/her 3 qualified dependent children at Php25,000 each?

No, pursuant to Revenue Regulations 2-94, the benefactor of a senior citizen cannot claim the additional exemption. Further, additional exemptions of individual taxpayers are removed under RA 10963 (Tax Reform for Acceleration and Inclusion).


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