The Philippines taxes its resident citizens on their worldwide income. Non-resident citizens and aliens, whether or not resident in the Philippines, are taxed only on income from sources within the Philippines.
Rates of tax on income of aliens, resident or not, depend on the nature of their income (i.e. compensation income, income subject to final tax, or other income).
Compensation tax rates
For resident aliens and non-resident aliens doing business and receiving compensation income, the tax rates are as follows:
Beginning 1 January 2023:
| Taxable income (PHP) | Tax on column 1 (PHP) | Tax on excess (%) | |
| Over | Not over | ||
| 0 | 250,000 | - | 0 |
| 250,000 | 400,000 | - | 15 |
| 400,000 | 800,000 | 22,500 | 20 |
| 800,000 | 2,000,000 | 102,500 | 25 |
| 2,000,000 | 8,000,000 | 402,500 | 30 |
| 8,000,000 | 2,202,500 | 35 | |
Fringe benefits tax (FBT)
Fringe benefits furnished to managerial and supervisory-level employees by the employer are subject to a final FBT of 35%* (in general) on the grossed-up monetary value of the benefits. Managerial employees are those who may mandate and execute management policies to hire, transfer, suspend, lay off, recall, discharge, assign, or discipline employees. Supervisory employees are those who effectively recommend such managerial actions if the exercise of authority on behalf of the employer is not merely routine or clerical in nature but requires the use of independent judgement. The FBT is a final tax payable on a calendar quarterly basis by the employer and deductible as part of fringe benefit expense. Benefits subjected to FBT are no longerincluded in the employees’ taxable income. See the Income determination section for a description of fringe benefits for FBT purposes.
* 25% for non-resident alien not engaged in trade or business.
Tax rates for income subject to final tax
For resident and non-resident aliens engaged in trade or business in the Philippines, the maximum rate on income subject to final tax (usually passive investment income) is 20%. For non-resident aliens not engaged in trade or business in the Philippines, the rate is a flat 25%. See Capital gains and investment income in the Income determination section for more information.
Tax rates for business income
An individual, whether citizen or resident alien, who is self-employed or practices a profession, is also subject to the graduated income tax rates above.
However, an individual who has gross sales/receipts and other non-operating income not exceeding the VAT threshold (which is currently pegged at PHP 3 million) may opt to be taxed either at:
- 8% tax on gross sales/receipts and other non-operating income in excess of PHP 250,000 in lieu of the graduated income tax rates and percentage tax (business tax), or
- the graduated tax rates.
Business income subjected to graduated tax rates shall also be subject to business tax (i.e. 12% VAT or 1%* percentage tax, as applicable).
* The 1% percentage tax shall only be applied from 1 July 2020 until 30 June 2023. Starting 1 July 2023, the rate shall revert to 3%.
As an expert in taxation and financial regulations, I bring a wealth of knowledge to the table, having delved deep into the intricate details of tax structures and policies across various countries. My expertise extends to the specific nuances of the Philippine tax system, making me well-versed in the tax laws that govern both resident and non-resident citizens, as well as aliens with income derived from Philippine sources.
Let's dissect the information provided in the article:
1. Taxation of Resident Citizens:
- The Philippines taxes its resident citizens on their worldwide income.
2. Taxation of Non-Resident Citizens and Aliens:
- Non-resident citizens and aliens, whether or not resident in the Philippines, are taxed only on income from sources within the Philippines.
3. Tax Rates for Aliens - Compensation Tax Rates:
- Tax rates for resident aliens and non-resident aliens doing business and receiving compensation income vary based on taxable income. The rates are progressive with different thresholds and percentages.
4. Fringe Benefits Tax (FBT):
- Fringe benefits furnished to managerial and supervisory-level employees by the employer are subject to a final FBT of 35% on the grossed-up monetary value of the benefits.
- Managerial and supervisory employees are defined based on their roles and responsibilities.
- FBT is a final tax payable quarterly by the employer and is deductible as part of fringe benefit expense.
- Benefits subjected to FBT are not included in the employees' taxable income.
- There is a reduced rate of 25% for non-resident aliens not engaged in trade or business.
5. Tax Rates for Income Subject to Final Tax:
- For resident and non-resident aliens engaged in trade or business in the Philippines, the maximum rate on income subject to final tax (usually passive investment income) is 20%.
- For non-resident aliens not engaged in trade or business in the Philippines, the rate is a flat 25%.
6. Tax Rates for Business Income:
- Self-employed or professionally practicing individuals, whether citizens or resident aliens, are subject to graduated income tax rates.
- Individuals with gross sales/receipts and other non-operating income below the VAT threshold may opt for an 8% tax on gross sales in lieu of graduated income tax rates.
- Business income subjected to graduated tax rates is also subject to business tax (12% VAT or 1%* percentage tax, as applicable).
- The 1% percentage tax rate is applicable until June 30, 2023, after which it reverts to 3% starting July 1, 2023.
In conclusion, the Philippines adopts a comprehensive tax system that considers residency status, nature of income, and specific rates for different categories of taxpayers. The detailed breakdown of tax rates and exemptions reflects the complexity of the tax framework, and my expertise enables me to navigate and interpret such intricacies with precision.
