Philippine Income Tax System and Rates

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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). Resident citizens and domestic corporations are taxed on income from sources within and outside the Philippines; nonresident citizens, overseas contract workers, aliens and foreign corporations are taxed only on Philippine-source income (NIRC §23). For individuals the tax is progressive, so higher earners pay a higher percentage of their income as tax.

Who Must Pay Income Tax

Individuals with taxable income above ₱250,000 pay income tax, and self-employed individuals and professionals file returns regardless of income. Employees with one employer whose tax was correctly withheld qualify for substituted filing, and individuals whose income was fully subjected to final tax need not file (NIRC §51(A)(2)). OFWs pay tax only on Philippine-source income. Corporations, and partnerships other than general professional partnerships, pay income tax on their taxable income (NIRC §27).

Current Income Tax Rates (2023 Onward)

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):

• Up to ₱250,000: 0%
• Over ₱250,000 to ₱400,000: 15% of the excess over ₱250,000
• Over ₱400,000 to ₱800,000: ₱22,500 plus 20% of the excess over ₱400,000
• Over ₱800,000 to ₱2,000,000: ₱102,500 plus 25% of the excess over ₱800,000
• Over ₱2,000,000 to ₱8,000,000: ₱402,500 plus 30% of the excess over ₱2,000,000
• Over ₱8,000,000: ₱2,202,500 plus 35% of the excess over ₱8,000,000

Nonresident aliens not engaged in trade or business in the Philippines pay a 25% final tax on gross Philippine-source income (NIRC §25(B)).

Taxable Income and Deductions

Taxable income is calculated by subtracting allowable deductions from gross income. Employees cannot claim deductions against compensation; their taxable income is gross compensation minus mandatory contributions, 13th month pay and other benefits up to ₱90,000, and de minimis benefits. 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 10% of taxable income before the deduction for individuals and 5% for corporations, except fully deductible donations). Personal, living or family expenses are not deductible (NIRC §34(H), §36).

Filing Requirements and Deadlines

Individual taxpayers must file their annual ITR on or before April 15 of the following year (NIRC §51). Corporations file on or before the 15th day of the fourth month after the close of their taxable year (NIRC §77). Extensions may be granted by the BIR upon written request. Late filing and payment result in a 25% surcharge on the unpaid tax plus 12% annual interest (NIRC §248, §249).

Special Income Tax Regimes

Optional Standard Deduction (OSD): Self-employed individuals and professionals may elect a standard deduction of 40% of gross sales or receipts instead of itemizing deductions (NIRC §34(L)). Corporations that elect OSD deduct 40% of gross income.

8% income tax option: Self-employed individuals and professionals with gross sales or receipts of ₱3,000,000 or less who are not VAT-registered may pay 8% on gross sales or receipts above ₱250,000 instead of graduated rates and the 3% percentage tax (NIRC §24(A)(2)(b), RR 8-2018).

Barangay Micro Business Enterprises (BMBEs): Businesses with total assets of not more than ₱3,000,000, excluding the land on which the office, plant and equipment stand, may register as BMBEs and are exempt from income tax on income from their BMBE operations (RA 9178).

Capital Gains and Investment Income

The sale of real property held as a capital asset is subject to a 6% final capital gains tax on the highest of the gross selling price, zonal value or fair market value (NIRC §24(D)). Net capital gains on shares not traded on a stock exchange are taxed at 15%; sales of listed shares through the exchange pay a stock transaction tax of 0.1% of the gross selling price from July 1, 2025 instead of income tax. Bank interest and dividends are subject to final tax (NIRC §24(B)); rental income is ordinary income taxed at graduated rates.

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. Creditable taxes withheld, such as on compensation, are credited against the taxpayer's annual income tax; final taxes are not (NIRC §57, §58(E)).

Penalties and Interest

Underpayment of income tax results in a 25% surcharge plus 12% annual interest on the unpaid amount (NIRC §248, §249); micro and small taxpayers pay 10% and 6%. Willful neglect to file or a fraudulent return raises the surcharge to 50%. Fraudulent returns or evasion may result in criminal prosecution and imprisonment (NIRC §254-256).