General Taxation

Taxation (General)

How much tax does an individual have to pay?

The general income of an individual is taxed at different rates, according to how much one earns. When one files his income tax returns, the rates imposed are the following:

P10,000 and below 5%
P10,000 to P30,000 P500 + 10% of the excess over P10,000
P30,000 to P70,000 P2,500 + 15% of the excess over P30,000
P70,000 to P140,000 P8,500 + 20% of the excess over P70,000
P140,000 to P250,000 P22,500 + 25% of the excess over P140,000
P250,000 to P500,000 P50,000 + 30% of the excess over P250,000
P500,000 and above P125,000 + 35%* of the excess over P500,000

However, there are still indirect sources of income called passive incomes. These include interest incomes from savings, prizes won, etc.

1. Interest income

      1. 3 years to less than 4 years – 12% 4 years to less than 5 years – 5%

        5 years and above – 0%

Are these rates also applicable to resident aliens and nonresident aliens?

The rates printed above are also applicable to resident aliens. Nonresident aliens are taxed the same way except in two categories:

    1. Dividends – 20% (for resident aliens and citizens this is only 8%)
    2. Income from cinematographic films and the like – 25%

Aliens who are employed at the regional headquarter of a multinational corporation, offshore banking unit, or a petroleum service contractor, have preferential rates of general income tax. The same applies for Filipinos occupying the same positions as these aliens.

    1. General income tax – 15% of compensation income
    2. Passive income – same as the rates of citizens

How much tax does a corporation have to pay?

1) General tax

In general, the income of a corporation is taxed at a rate of 35%.

2) Passive income

Passive incomes of domestic corporations are also subject to tax. They are imposed at the following rates:

3) Minimum Corporate Income Tax (MCIT)

The MCIT is imposed at 2% of the annual gross income of a corporation. A corporation either pays the general tax of 32% their gross income, or the MCIT, whichever is higher. This is imposed only:

4) Improperly Accumulated Earnings (IAE) Tax

The IAE tax is imposed on corporations formed or availed of for the purpose of avoiding income tax (with respect to its shareholders or shareholders of other corporations) by permitting earnings to accumulate instead of being distributed. A corporation is assumed to be formed for the purpose of avoiding tax on its shareholders or members if:

The IAE tax does not apply to publicly held corporations, banks and other financial intermediaries, and insurance companies.

The Improperly Accumulated Taxable Income is the amount of income that has avoided being taxed by adjusting any of the following:

And less the following:

The Improperly Accumulated Taxable Income is subject to 10% tax.

5) Fringe Benefits Tax (FBT)

The FBT is a final tax imposed on the grossed up monetary value (monetary value divided by 67%*) of fringe benefits granted by the employer to an employee holding a managerial or supervisory position. The employer withholds the amount of tax due from the employee. FBT is imposed at 32%.

FBT = (Monetary value of fringe benefits / 67%*) x 32%

How does one calculate the gross income of the corporation for the MCIT?

The gross income is calculated as the gross sales less sales returns, discounts, allowances of cost of goods sold, production expenses, freight, import duties, and expenses incurred by transporting the goods from their place of production to the present location.

In the case of companies engaged in sale of service, the gross income is calculated as gross receipts less sales returns, discounts, allowances, salary expenses, fringe benefits expenses, rental expenses for equipment or facilities, depreciation expenses, and supplies expenses.

Are there any exemptions from the general tax of 31%?

Yes, there are.

Are there any exemptions from the MCIT?

All corporations that have reached their fourth taxable year and have a regular income tax that is lower than the MCIT are subject to the MCIT. However, a corporation may be exempted upon the authorization of the Secretary of Finance to suspend the imposition of MCIT. A suspension of MCIT may be authorized if the corporation has suffered losses due to a prolonged labor dispute or other legitimate business reverses.

How are resident foreign companies taxed?

Most resident foreign companies are taxed in the same way as domestic corporations, but only on their Philippine sources of income. The following are the few exceptions to this rule:

    1. International Carriers

      2. - International carriers are taxed 2.5% of the gross revenue from carriage of persons, excess baggage, cargo, and mail originating from the Philippines.

    2. Branch Profits Remittance Tax

      3. - The total profits applied or earmarked for remittances are taxed at 15%.

    3. Regional Operating Headquarters

What are fringe benefits subject to the FBT?

Fringe benefits simply mean any good, service, or other benefit furnished or granted by an employer in cash or in kind, to an individual non-managerial and non-supervisory employee. Fringe benefits are granted in addition to the basic salary. Examples of fringe benefits are the following:

What are the exemptions to the FBT?

What constitutes as the gross income subject to the general tax?

Generally, the gross income refers to all income derived from whatever source, including:

    1. Compensation income for services
    2. Gross income from business, trade, or the exercise of a profession
    3. Gains derived from dealings in property
    4. Interests
    5. Rents
    6. Royalties
    7. Dividends
    8. Annuities
    9. Prizes and winnings
    10. Pensions
    11. Partner’s distributive share from the net income of GPPs

    1. Life insurance proceeds
    2. Amount received by the insured as return of premium
    3. Gifts, bequests, and the like
    4. Compensation for injuries or sickness
    5. Income exempt under treaty
    6. Retirement benefits, pensions, gratuities, etc.
    7. 13th month pay not exceeding P30,000
    8. GSIS, SSS, Medicare, union dues, and other contributions
    9. Prizes and awards from sports competitions
    10. Gain from sale or exchange of bonds and other certificates with maturity of more than 5 years
    11. Gain from redemption of shares in a mutual fund company.

What are allowable deductions from the gross income subject to the general tax?

    1. Business Expenses

      2. - These only include those expenses directly attributable to the development, management, or operation of the business, trade, or exercise of profession. Examples of deductible business expenses are salary expenses, travel expenses, rental expenses, recreation expenses intended to promote the efficiency of employees, etc.

    2. Interest

      3. - Only 38% of the interest incurred or paid during the year can be deducted from the taxable income. However, interest incurred from acquiring property to be used in the business may be counted as an expense.

    3. Taxes

      4. - Taxes paid or incurred within the taxable year in connection with the business are allowed as a deduction, except for the general income tax, income taxes imposed by authorities from foreign countries, and estate and donor’s taxes. However, when these taxes are refunded or credited, they are still included as part of the gross income in the year of receipt to the extent of the income tax benefit of said deduction.

    4. Losses

      5. - Losses sustained during the taxable year are allowable deductions if incurred in the business. Also deductible are losses of property arising from fires, storms, etc., or robberies, theft, embezzlement, and the like.

      - The Net Operating Loss (NOL) is the excess of allowable deductions over gross income. The NOL may be carried over and deducted from taxable income for the succeeding three years. It is only applicable if the NOL was incurred during a year the taxpayer was not exempt from income tax, and if there has been no substantial change in ownership in the business (at least 75% of the outstanding shares or paid-up capital are still held by the same persons).

    5. Depreciation

      6. - Depreciation expense of a business asset is a deductible expense.

    6. Charitable contributions and the like

      7. - The amount of charitable contributions deductible is limited to only the acquisition cost of the property contributed. Contributions are only deductible if they are made to accredited organizations.

    7. Research and Development

      8. - Research and development expenses that are made in connection to the trade, business, or profession, may be treated as deductible business expenses.

    8. Premium Payments on Health and Hospitalization Insurance

      1. The gross income of the family is not more than P250,000 annually.
      2. Premiums and/or insurance for the taxpayer should not exceed P2,400 per family annually (P200 per month).

What are the deductions from taxable income for individual taxpayers in general?

    1. Single individual or legally separated married individual with no qualified dependents

      2. - P20,000

    2. Head of the family

      3. - P25,000

    3. Each married working individual


      4. - P32,000

    4. Additional deductions for each dependent (not exceeding four)

      5. - P8,000

How does one compute for taxes in long-term contracts?

Long-term contracts would refer to building, installation, or construction contracts that are in effect for more than a year. Since taxes are paid yearly, the taxes due on such long-term contracts would be based on the percentage completed within the taxable year.