Income taxation in the Philippines is primarily governed by the National Internal Revenue Code (NIRC) of 1997, as significantly amended by Republic Act No. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion (TRAIN) Law, and Republic Act No. 11534, or the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act.
The computation of the Income Tax Return (ITR) depends on the classification of the taxpayer—whether an individual or a corporation—and the nature of the income earned.
I. Computation for Individual Taxpayers
Individual taxpayers include resident citizens, non-resident citizens, and resident aliens. Their income is generally categorized into Compensation Income, Business/Professional Income, or Mixed Income.
1. Purely Compensation Income Earners
These are individuals earning strictly from an employer-employee relationship. Under the TRAIN Law, the computation is simplified as personal and additional exemptions have been replaced by a standard non-taxable threshold.
The Formula: $$\text{Taxable Income} = \text{Gross Compensation Income} - \text{Non-Taxable/Exempt Income}$$
- Gross Compensation Income: Includes all salaries, wages, and allowances.
- Non-Taxable Income: Includes SSS/GSIS/PhilHealth/Pag-IBIG contributions, and "De Minimis" benefits within the ceiling (e.g., 13th-month pay and other benefits up to ₱90,000).
Once the Taxable Income is determined, the Graduated Tax Table is applied. As of January 1, 2023, the rates are as follows:
| Taxable Income Range | Tax Rate |
|---|---|
| Not over ₱250,000 | 0% |
| Over ₱250,000 to ₱400,000 | 15% of excess over ₱250,000 |
| Over ₱400,000 to ₱800,000 | ₱22,500 + 20% of excess over ₱400,000 |
| Over ₱800,000 to ₱2,000,000 | ₱102,500 + 25% of excess over ₱800,000 |
| Over ₱2,000,000 to ₱8,000,000 | ₱402,500 + 30% of excess over ₱2,000,000 |
| Over ₱8,000,000 | ₱2,202,500 + 35% of excess over ₱8,000,000 |
2. Self-Employed and Professionals (SEP)
Individuals whose gross sales or receipts do not exceed the VAT threshold (₱3,000,000) have two options for computation:
- Option A: Graduated Rates. Computed the same way as compensation earners but allowing for either Itemized Deductions or an Optional Standard Deduction (OSD) of 40% of gross sales/receipts.
- Option B: 8% Flat Rate. This is applied to the gross sales/receipts (and non-operating income) in excess of ₱250,000, in lieu of both the graduated income tax and the 3% percentage tax.
$$\text{Tax Due} = (\text{Gross Sales/Receipts} - ₱250,000) \times 8%$$
II. Computation for Corporate Taxpayers
Under the CREATE Act, corporate income tax rates were reduced to stimulate economic recovery.
1. Regular Corporate Income Tax (RCIT)
For domestic corporations, the RCIT is generally 25%. However, for domestic corporations with net taxable income not exceeding ₱5,000,000 and total assets (excluding land) not exceeding ₱100,000,000, the rate is 20%.
The Formula: $$\text{Taxable Income} = \text{Gross Income} - \text{Allowable Deductions}$$ $$\text{Income Tax Due} = \text{Taxable Income} \times \text{Applicable Rate (20% or 25%)}$$
2. Allowable Deductions
Corporations can choose between:
- Itemized Deductions: Ordinary and necessary expenses (rent, salaries, interest, taxes, etc.) supported by official receipts.
- Optional Standard Deduction (OSD): A maximum of 40% of the Gross Income.
3. Minimum Corporate Income Tax (MCIT)
A corporation is liable for MCIT beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations. The MCIT is 2% of the Gross Income (as of the current prevailing rate). The tax due is whichever is higher between the RCIT and the MCIT.
III. Final Tax and Creditable Withholding Tax
It is crucial to distinguish between income subject to the ITR and income subject to Final Tax.
- Final Taxes: These are withheld at source and are not included in the ITR computation (e.g., interest on bank deposits, royalties, and prizes).
- Creditable Withholding Taxes (CWT): These are taxes withheld by payors (e.g., expanded withholding tax on professional fees). These are not a final tax but are instead treated as "tax credits" that are deducted from the total income tax due computed in the ITR.
Final Computation for Payment: $$\text{Total Income Tax Due} - \text{Tax Credits (CWT/Prior Year Excess)} = \text{Tax Payable/(Refundable)}$$
IV. Filing and Deadlines
The annual ITR (BIR Form 1700 for compensation earners, 1701 for individuals with business income, and 1702 for corporations) must be filed on or before April 15 of each year, covering the income earned during the preceding taxable year. Failure to compute and file correctly subjects the taxpayer to civil penalties (25% to 50% surcharge), interest (12% per annum), and potential criminal liability for tax evasion.