Philippine Income Tax System and Rates

Overview of Philippine Income Tax

Income tax is the primary direct tax collected by the Bureau of Internal Revenue (BIR) under the National Internal Revenue Code (NIRC). It applies to all persons, whether natural or juridical, who derive income from any source within or outside the Philippines (NIRC §24). The tax is progressive, meaning higher earners pay a higher percentage of their income as tax.

Who Must Pay Income Tax

All individuals who are Philippine residents or citizens earning income above the minimum threshold must file an annual income tax return (ITR). This includes salaried employees, self-employed professionals, business owners, investors, and overseas Filipino workers (OFWs) with Philippine-sourced income. Corporations and partnerships also pay income tax on their net income (NIRC §24).

Current Income Tax Rates (2024)

As amended by the TRAIN Law (RA 10963) and subsequent tax reform measures, individual income tax in the Philippines uses the following graduated brackets:

For individuals (resident citizens and aliens):

• ₱0 to ₱250,000: 0% (tax-free)
• ₱250,001 to ₱400,000: 15%
• ₱400,001 to ₱800,000: 20%
• ₱800,001 to ₱2,000,000: 25%
• ₱2,000,001 to ₱5,000,000: 30%
• Above ₱5,000,000: 35%

Non-resident aliens are taxed at a flat 25% on Philippine-sourced income (NIRC §24(B)).

Taxable Income and Deductions

Taxable income is calculated by subtracting allowable deductions from gross income. For employees, the standard deduction is ₱150,000 per annum or 40% of gross income, whichever is lower (NIRC §34(C)). Self-employed individuals and business owners may claim itemized deductions for ordinary and necessary business expenses, subject to substantiation requirements (NIRC §34(A)).

Common deductible expenses include cost of goods sold, salaries and wages, rent, utilities, professional fees, depreciation, and charitable contributions (limited to 5% of taxable income before deduction). Personal expenses, fines, and penalties are generally non-deductible (NIRC §34).

Filing Requirements and Deadlines

Individual taxpayers must file their annual ITR on or before April 15 of the following year (NIRC §51). Corporations file within 105 days from the end of their fiscal year. Extensions may be granted by the BIR upon written request. Failure to file results in penalties of 25% of the unpaid tax plus 12% annual interest (NIRC §248).

Special Income Tax Regimes

Optional Standard Deduction (OSD): Self-employed individuals and professionals may elect to use a standard deduction of 8% of gross income instead of itemizing deductions (NIRC §34(C)).

Simplified Income Tax System (SITS): Individuals with gross income not exceeding ₱3,000,000 and no employees may opt for SITS, paying 8% of gross income as final tax (RR 2-2009).

Barangay Micro Business Enterprises (BMBEs): Businesses with gross annual income not exceeding ₱3,000,000 may register as BMBEs and pay 1% gross income tax as final tax (RA 9178).

Capital Gains and Investment Income

Capital gains from the sale of real property are taxed at 6% (final tax) or included in regular income tax, whichever is lower (NIRC §24(D)). Gains from the sale of shares of stock traded on the Philippine Stock Exchange are taxed at 15% (final tax). Dividends, interest, and rental income are subject to graduated income tax rates or final withholding tax, depending on the source (NIRC §24(E)).

Withholding Tax Obligations

Employers are required to withhold income tax from employee salaries and remit it monthly to the BIR (NIRC §79). Banks and financial institutions withhold final tax on interest income. Corporations withhold tax on dividends paid to shareholders. These withholdings are credited against the taxpayer's annual income tax liability (NIRC §76).

Penalties and Interest

Underpayment of income tax results in a 25% surcharge plus 12% annual interest on the unpaid amount (NIRC §248). Failure to file an ITR incurs a 25% penalty. Fraudulent returns or evasion may result in criminal prosecution and imprisonment (NIRC §254-256).