Governing tax law in the Philippines is the National Internal Revenue Code of 1997.

The Bureau of Internal Revenue (BIR) is the primary implementing agency of this law.
• Taxation is the process by which the government collects revenue in order to pay for its expenses.
• Income tax is defined as the tax on the net income or the entire income realized in one taxable year

Who are required to pay income tax in the Philippines? (Section 23 of the National Internal
Revenue Code [NIRC] of 1997)
- A citizen of the Philippines, living in the Philippines, is taxable on all income earned inside and
outside the Philippines;
- A non-resident citizen is taxable only on income earned in the Philippines;
- An OFW is taxable only on income earned in the Philippines.
- A foreigner living in the Philippines is taxable only on income earned in the Philippines.
- A domestic corporation is taxable on all income derived from sources inside and outside the
Philippines; and
- A foreign corporation is taxable only on the income derived inside the Philippines.
List of sources of gross income: (NIRC 1997 Chapter 6 Section 32 A)
• 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 a profession;
• Gains derived from dealings in property; (Note: subject to 6% capital gains tax for individuals and for
corporation if land and building is not used in business)
• Interests; (Note: generally subject to 20% final withholding tax)
• Rents;
• Royalties; (Note: generally subject to 20% final withholding tax,10% if from books and literary works)
• Dividends; (Note: generally subject to 10% final withholding tax for individuals, tax exempt for
corporation)
• Annuities;
• Prizes and winnings; (Note: generally subject to 20% final withholding tax, except those that are tax
exempt based on specific criteria in the law)
• Pensions; and
• Partner's distributive share from the net income of the general professional partnership.

Compensation Income
• Employed individuals that earn compensation income pay their income taxes monthly.
Employerswithhold the income tax of their employees from their monthly gross income and remit these
sums to the BIR.
• Philippine individual income tax is progressive. The tax rate increases as the tax base increases which
means that tax payers with more capacity to pay will pay more taxes.

• All individual taxpayers are granted a personal exemption of P 50,000. Additional exemptions of
₱ 25,000 are given for each qualified dependent but only up to four dependents. For husband and
wives with children, only one spouse can claim the additional exemption. The husband is deemed
head of the family and will claim the deduction unless he explicitly waves his right in favor of his wife.
• Withholding income tax for employees:
- Employers are required by law to withhold income tax dues from their employees’ salary.
- It is implemented because employees might not have sufficient cash to pay for their income tax dues if
aggregated to a one time annual payment.
- The withholding tax deduction is computed based on the employee’s gross compensation (net of
mandatory contributions to SSS or GSIS, Philhealth and Pag-ibig Fund), tax status, timing of
compensation payments and using the published BIR withholding tax table.
• Income tax is computed at the end of the year based on all compensation income derived during the
year.
- Taxable income is computed after deducting personal and additional exemptions.
- Applicable tax rate is applied on the taxable income to get the tax due.
- The total income tax withheld by the employer is deducted from the tax due to get remaining tax
liability by the employee.
• Taxpayers who derive their income solely from compensation are required to file BIR Form 1700 as
their income tax returns. However, to give relief to these taxpayers, the employee may present BIR Form
2316 as their income tax return. BIR Form 2316 is a statement issued by the employer and signed by the
employee but not filed with the BIR. This is referred to as substituted filing.

Business Income
• The tax payments of a business organized as a sole proprietorship are made in the name of its owner.
The owner is considered an individual taxpayer who derived income from business. He is required to file
BIR Form 1701.
• Businesses may settle their income tax liabilities and submit their income tax returns (tax form) to the
government three months and fifteen days from the close of the year. For a business that follows a
calendar year, the date of settlement is April 15.

• Two approaches for the computation of income tax for the business:
a. Itemized deduction. Use the itemized expenses in the income statement. The business should
have a complete set of accounting books and supporting receipts for the deductions that were
itemized on the tax form.
b. Optional standard deduction scheme. Deductions are up to a maximum of 40% of “gross
receipts”. “Gross receipts” is equal to net sales plus other taxable income. This means that the
business taxable income is equivalent to 60% of gross receipts.
“Mixed Income Earner” is a compensation-earner who at the same time is engaged in business or
practice of profession.A taxpayer deriving mixed income will also use BIR Form 1701.
V. Taxable Income and Tax Due

A. Compensation Income:
Gross compensation (salary and other bonuses)
Less: Statutory contributions (SSS or GSIS, PhilHealth and Pag-ibig Fund)
Gross compensation, net of statutory payments
Less: 13th month pay and other bonuses that are exempted from income tax
= Gross taxable compensation income
Less: Personal ( P 50,000 per tax payer) and additional deductions (P 25,000 per qualified dependent,max
of 4)
= Net taxable compensation income