Overview
This lecture introduces the concept of gross income and focuses on the classification of individual taxpayers in the Philippines. It explains their tax obligations, the sources and situs (location) of income taxation, and the requirements for citizenship. The lesson is divided into several parts, with this section concentrating on the classification of individual taxpayers and their respective tax treatments.
Classification of Taxpayers
- Taxpayers are classified as either individuals (natural persons) or corporate taxpayers (artificial persons such as corporations or partnerships).
- This lesson focuses on individual taxpayers, whose classification is determined by their citizenship and residency status.
- Proper identification of a taxpayer’s residency and citizenship is essential to determine which incomes are subject to Philippine income tax.
Types of Individual Taxpayers
There are five classifications of individual taxpayers in the Philippines, each with specific tax obligations and criteria:
-
Resident Citizen (RC):
- A Filipino citizen who resides and lives in the Philippines.
- Taxed on all income, whether earned within the Philippines or abroad (worldwide income).
- Qualifications for Citizenship:
- Citizens of the Philippines at the time of the adoption of the 1987 Constitution.
- Individuals whose father or mother is a Filipino citizen.
- Those born on January 17, 1973, of Filipino mothers who elect Philippine citizenship upon reaching the age of majority.
- Individuals who are naturalized in accordance with Philippine law.
- Must be both a Filipino citizen and a resident of the Philippines to be classified as a resident citizen.
-
Non-Resident Citizen (NRC):
- A Filipino citizen who resides abroad and is not living in the Philippines.
- Includes those who:
- Physically reside abroad with the intention to live there permanently, as proven to the satisfaction of the Commissioner of Internal Revenue.
- Leave the Philippines during the taxable year to reside abroad as immigrants or for permanent employment (e.g., Overseas Filipino Workers).
- Stay outside the Philippines for more than 183 days (about six months) in a calendar year.
- Taxed only on income derived from sources within the Philippines; income earned abroad is not subject to Philippine tax.
-
Resident Alien (RA):
- A foreigner who has acquired residency in the Philippines.
- Considered a resident if their stay or work assignment in the Philippines is indefinite, or if they have resided in the country for more than two years (based on specific tax rulings).
- Taxed only on income derived from sources within the Philippines; income from abroad is not taxed in the Philippines.
-
Non-Resident Alien Engaged in Trade or Business (NRAETB):
- A foreigner who has not acquired residency but is doing business in the Philippines.
- Considered engaged in trade or business if they stay in the Philippines for more than 180 days (over six months) in a calendar year.
- Taxed only on income derived from sources within the Philippines; income from abroad is not taxed in the Philippines.
-
Non-Resident Alien Not Engaged in Trade or Business (NRANETB):
- A foreigner who stays in the Philippines for not more than 180 days (six months) in a calendar year, such as tourists.
- Not considered to be doing business in the Philippines.
- Taxed only on income derived from sources within the Philippines, subject to a flat 25% final withholding tax on total gross income.
- The 25% tax is withheld at source by the payer before the income is paid to the non-resident alien.
Sources and Situs of Income Taxation
- Resident Citizens (RC):
- Taxed on all income, whether earned within or outside the Philippines (global taxation).
- Non-Resident Citizens (NRC), Resident Aliens (RA), NRAETBs, and NRANETBs:
- Taxed only on income derived from sources within the Philippines.
- Income earned from sources outside the Philippines is not subject to Philippine income tax, but may be taxed in the country where it is earned.
- NRANETBs:
- Subject to a 25% final withholding tax on all Philippine-sourced income, regardless of the type of income.
- The tax is withheld by the payer before the income is received by the taxpayer.
Taxation Methods
- Normal Tax:
- Refers to the graduated tax rates or the optional 8% rate, applied to taxable income.
- Used for most individual taxpayers, such as resident citizens and resident aliens, on their taxable income.
- Final Tax:
- Tax withheld at the source and considered full payment of the tax liability.
- Commonly applied to certain types of income, such as the 25% tax for NRANETBs.
- The taxpayer does not need to file further tax returns for income subject to final tax.
Key Terms & Definitions
- Taxpayer: A person or entity required by law to file and pay taxes as imposed by the National Internal Revenue Code.
- Resident Citizen (RC): A Filipino citizen living and residing in the Philippines, taxed on worldwide income.
- Non-Resident Citizen (NRC): A Filipino citizen residing abroad, taxed only on Philippine-sourced income.
- Resident Alien (RA): A foreigner legally residing in the Philippines, taxed only on Philippine-sourced income.
- Non-Resident Alien Engaged in Trade or Business (NRAETB): A foreigner doing business in the Philippines for over 180 days, taxed only on Philippine-sourced income.
- Non-Resident Alien Not Engaged in Trade or Business (NRANETB): A foreigner in the Philippines for not more than 180 days, taxed at 25% final withholding tax on Philippine-sourced income.
- Situs: The place or source of income for tax purposes, which determines where the income is taxed.
- Normal Tax: Tax imposed using regular graduated or fixed rates on taxable income.
- Final Tax: Tax withheld at source and considered complete payment of the tax liability.
Action Items / Next Steps
- Review the five classifications of individual taxpayers and understand their respective tax obligations and criteria.
- Study the requirements for Philippine citizenship and how they affect taxpayer classification.
- Understand the difference between normal tax and final tax, and how each applies to different taxpayer classifications.
- Prepare for the next lesson, which will cover the types of income included and excluded from gross income, as well as the computation of gross and net taxable income according to the tax code.