The Philippines operates on a semi-global and schedular tax system. Determining a taxpayer's classification is the foundational step in tax compliance, as it dictates the tax base (global vs. Philippine-source income), the applicable tax rates, and the allowable deductions. Under the National Internal Revenue Code (NIRC) of 1997, as amended by the TRAIN Law and the CREATE Act, taxpayers are primarily divided into individuals and corporations.
I. Individual Taxpayers
Individual taxpayers are classified based on their citizenship and their residence. This distinction is critical because it determines whether the State can tax their worldwide income or only income earned within Philippine borders.
1. Resident Citizens (RC)
These are Filipino citizens residing in the Philippines.
- Tax Base: Taxable on income derived from all sources (within and without the Philippines).
- Key Feature: They are the only individual taxpayers subject to tax on global income.
2. Non-Resident Citizens (NRC)
A Filipino citizen who:
- Establishes to the satisfaction of the Commissioner the fact of their physical presence abroad with a definite intention to reside therein.
- Leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis.
- Works and derives income from abroad and whose employment thereat requires them to be physically present abroad most of the time during the taxable year.
- Tax Base: Taxable only on income derived from sources within the Philippines.
3. Resident Aliens (RA)
An individual whose residence is within the Philippines and who is not a citizen thereof (e.g., an expat living in Manila for an indefinite period).
- Tax Base: Taxable only on income derived from sources within the Philippines.
4. Non-Resident Aliens (NRA)
An individual who is neither a citizen nor a resident of the Philippines. They are further sub-classified into:
- NRA Engaged in Trade or Business (NRA-ETB): Those who stay in the Philippines for an aggregate period of more than 180 days during any calendar year.
- NRA Not Engaged in Trade or Business (NRA-NETB): Those who stay for 180 days or less. They are generally subject to a final withholding tax of 25% on gross income.
II. Corporate Taxpayers
A "corporation" under the Tax Code includes partnerships (except General Professional Partnerships), joint-stock companies, joint accounts, and associations.
1. Domestic Corporations (DC)
Created or organized in the Philippines or under its laws.
- Tax Base: Taxable on income from all sources (within and without the Philippines).
- Current Rate: Generally 25% (or 20% for MSMEs) Corporate Income Tax (CIT).
2. Foreign Corporations (FC)
Organized under the laws of a foreign country.
Resident Foreign Corporations (RFC): Foreign corporations engaged in trade or business within the Philippines (e.g., Philippine branches).
Tax Base: Taxable only on income from sources within the Philippines.
Non-Resident Foreign Corporations (NRFC): Foreign corporations not engaged in trade or business in the Philippines (e.g., a foreign supplier).
Tax Base: Taxable only on income from sources within the Philippines, usually via a final withholding tax (currently 25% of gross income).
III. Special Classifications
Certain entities are subject to unique tax regimes due to the nature of their operations:
- General Professional Partnerships (GPP): Formed for the exercise of a common profession (e.g., Law or Accounting firms). The GPP itself is not subject to income tax; instead, the individual partners are liable for income tax in their separate and individual capacities.
- Tax-Exempt Corporations: Listed under Section 30 of the NIRC, including non-profit proprietary educational institutions and hospitals (subject to specific preferential rates), and certain non-stock, non-profit organizations.
- Estates and Trusts: For tax purposes, an estate (properties of a deceased person) or a trust is treated as a separate taxable entity and taxed in the same manner as individuals.
IV. Summary of Taxability
| Taxpayer Classification | Income Within Phils. | Income Outside Phils. |
|---|---|---|
| Resident Citizen | Taxable | Taxable |
| Non-Resident Citizen | Taxable | Non-Taxable |
| Resident Alien | Taxable | Non-Taxable |
| Non-Resident Alien | Taxable | Non-Taxable |
| Domestic Corporation | Taxable | Taxable |
| Foreign Corporation | Taxable | Non-Taxable |
V. The "Source" Rule
Because most classifications (except Resident Citizens and Domestic Corporations) are only taxed on Philippine-source income, the Situs of Taxation is paramount:
- Services: Taxable where the service is performed.
- Sale of Real Property: Taxable where the property is located.
- Royalties: Taxable where the intangible is used.
- Dividends: Depends on the residence/domicile of the corporation paying the dividend.