This post provides an overview of income taxation in the Philippines with the applicable graduate income tax rates under Section 21(A)(2) of the Tax Code of 1997, as amended by Republic Act No. 10963.
“Taxation in the Philippines is progressive.”
The Philippines applies the progressive system of taxation. A progressive tax system is one that emphasizes direct taxes. A direct tax cannot be shifted. Hence, it encourages economic efficiency as it leaves no other resort to taxpayers than to be efficient. This type of tax system impacts more upon the rich, and those who earn more.
Classification of Individual Taxpayers
Any individual taxpayer who has a source of income in the Philippines which is under the jurisdiction of a taxing authority is taxable upon the income he/she has earned. Taxation applies for individual income earners who earn purely compensation income, and for individuals engaged in the business and practice of the profession.
Individual Taxpayers are classified as follows:
Resident Citizen
Non-resident Citizen
Resident Alien
Non-resident Alien - Engaged in trade or business - Not engaged in trade or business
Purely Compensation Income Earners
Individual taxpayers who earn ordinary or regular income would have to pay income tax based upon the graduated income tax rates as prescribed under Section 21(A)(2) of the Tax Code of 1997, as amended by Republic Act No. 10963.
The tax tables for Individuals are as follows:
Source: pinoymoneytalk.com
Self-employed and Professionals (SEP)
Self-employed under RA 10963, a self-employed individual is defined as a sole proprietor or an independent contractor that reports earnings from self-employment.
Professionals are individuals involved in the practice of profession. An individual who completed his/her studies or practices is being formally certified by a professional body.
Under RA 10963 (TRAIN Law) for Purely SEP individuals whose income is more than 250,000 but with a gross sale and other non-operating income not meeting the VAT threshold of PHP3,000,000, the individual taxpayer has the option:
If the taxpayer's gross sales/gross receipts is not more than P3,000,000, he/she can choose to pay income tax based on the graduated tax table or at the optional 8% income tax.
The 8% Income Tax Option
The TRAIN law introduced an optional income tax for self-employed and or professionals (SEP) wherein they can opt to be taxed at 8% of gross sales or receipts and other non-operating income.
The 8% income tax shall be in lieu of the:
Progressive income tax, computed under the individual tax table; and
3% percentage business tax on sales or receipts
The 8% income tax is a form of a bundled tax which enables one-time compliance for two taxes which would otherwise require separate filing and payments. When the option is made, it shall be irrevocable for the calendar year.
Conditions to avail the 8% Income Tax Option:
The self-employed and/or professional states its intention in availing the 8% tax in the first quarter ITR or in the first quarter percentage tax return;
The self-employed and/or professional should be non-VAT registered;
The gross sale/receipt should not be obtained from VAT exempt sales or transactions;
The total gross sale/receipt and non-operating income does not exceed the VAT threshold of P3,000,000; and
The self-employed and professional are not subject to percentage tax other than sec.116.
Mixed Income Earner/SEP
Mixed income earners are those who derive income from business or practice of profession and compensation income.
Below is the taxation applied for mixed income earners:
Note: Sec.116 is a business tax that applies a 3% tax on gross sales/receipt and other operating income.
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