Income Tax in the Philippines: Exemptions and Processes

Income Tax in the Philippines | As soon as we receive our monthly salaries, we budget it immediately to cover necessary expenditures like a responsible adult would do. Our financial duties range from utility bills, grocery expenses, rent, and car payments. But these are not the only things. In most cases, our payroll appears with deductions for our income taxes. Welcome to the real world.

Income tax is one of the types of taxes collected in the Philippines. In simpler terms, it is a tax on an individual’s income, payments, profits from property, the practice of a profession, and conduct of trade and business. These are specified under the National Internal Revenue Code of 1997 (Tax Code).

This blog will enlighten you on your common questions on income taxes in the Philippines and will walk you through the exemptions and important processes. 

Are you required to file your income tax return (ITR)?

The Bureau of Internal Revenue (BIR) said you are required to file your ITR if you are a resident citizen who receives income from sources within the Philippines or abroad. This means that you are responsible to file a return if you:

continually or simultaneously receive income from two or more employers at any time during the taxable year

receive compensation regardless of the amount and the number of employees without your tax being withheld correctly

get income from business or trade 

get income from practicing your profession

receive income not related to business or professional practice on top of compensation income, or the payment you receive in exchange for your service

receive purely compensation income from one employer. This applies to you even if your income has been properly withheld but your spouse is not qualified for the substituted filing.

Even non-resident citizens are required to file ITR if they receive income from sources within the country. Furthermore, aliens, or persons belonging to foreign countries, are also covered if they get income from sources within the Philippines whether or not they are residents.

Aside from employed and self-employed individuals, who else is required to file ITRs?

The BIR made it clear that corporations regardless of their creation and organizations are also required to file ITRs. The same applies to domestic corporations that get income from sources here and abroad; foreign corporations receiving income from sources within the country; as well as estates and trusts involved in trade and business.

On the other hand, who is not required to file ITRs?

You are not obliged to file ITRs if you are a minimum wage earner, an individual earning purely compensation income that does not exceed PHP250, 000, or if your employer has withheld your income tax correctly.

The non-requirement also applies to those whose only income has been subjected to final withholding tax and those who are eligible under “substituted filing”. Substituted filing will apply to you if your employer has filed their Annual Information Return on Income Taxes Withheld which will be recognized as your “substitute” ITR.

Exemptions

Who is exempt from income tax?

A non-resident citizen who receives income outside of the Philippines is exempted from income tax. He or she should either be a citizen of the Philippines who:

establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a certain intention to reside therein

an immigrant or permanent employer who leaves the Philippines during the taxable year to live abroad

works and derives income from abroad and whose employment him to be physically present abroad most of the time during the taxable year

previously considered as a non-resident citizen who arrives in the Philippines for permanent residency at any time during the year. He or she will be considered a non-resident citizen during the taxable year in which he arrives in the country.

In addition to the non-resident citizen, Overseas Filipino Workers including seafarers are exempt from income tax as they work and receive income from outside the Philippines. They will, however, be taxable only on income from sources within the country. Contrary to that of OFWs, an income of a Filipino working at the Philippine Embassy or Consulate is taxable as he or she is not considered a non-resident citizen. 

The imposition of income tax further exempts General Professional Partnerships, which, according to Internal Revenue Code, are partnerships formed by people to practice their profession. These partnerships do not source income from involvement in any trade or business. 

Documents being processed at BIR Office Photo by PhilStar Global
Documents being processed at BIR Office Photo by PhilStar Global

Government-owned and controlled corporations (GOCC) of the Philippines including the Government Service Insurance System (GSIS), Social Security System (SSS), and the Philippine Health Insurance Corporation (PHIC) also maintain tax-exempt status. This means that the assets, revenues, and earnings of these entities are not subjected to tax, as specified in the Revised Government Service Insurance Act of 1977, Social Security Act of 1997, and National Health Insurance Act of 1995, accordingly.

Local Water Districts are likewise exempt from income tax, as stipulated in the National Internal Revenue Code (NIRC) of 1997. The amount supposedly intended for income tax is instead allocated by local water districts to improve water services in provinces, cities, and municipalities.

Who is exempt from personal income tax?

Personal income tax is a type of income tax imposed on the citizen’s salaries, wages, and other income types. According to the Tax Reform for Acceleration and Inclusion (TRAIN) Law, you are exempt from personal income tax if you are a compensation income earner, self-employed and professional taxpayer whose taxable annual income is PHP250, 000 or less.

The said law, which was signed by President Rodrigo Duterte to simplify the Philippine Tax System, further exempts 13th-month pay and other benefits amounting to PHP90, 000 from tax.

How is income tax paid?

Income tax is paid through withholding and direct payment of taxpayers. Payment through withholding happens when an employer correctly withholds an amount from the employee’s paycheck and forwards it to the government under the employee’s name. The BIR follows this rate for an individual and non-individual payee who pays income tax through withholding:

Individual PayeeRate
If the gross annual business or professional income did not exceed PHP3, 000, 000.005%
If the gross annual business or professional income is more than P3,000,000.0010%
Non-individual PayeeRate
If the gross annual business or professional income did not exceed P720,000.0010%
If the gross annual business or professional income is more than P720,000.0015%
Sample computation of taxes in the Philippines

Meanwhile, payment of the balance upon filing of ITR is computed as follows:

Income Tax DuePHP _________________
Less: Withholding Tax________________
Net Income Tax Due PHP _________________

According to the BIR, the taxpayer can pay in two installments if the tax due surpasses PHP2, 000. First, he or she can pay on the filing of ITR, and second, on or before October 15 following the close of the calendar year.

What are the requirements for ITR filing?

Before heading to the nearest Revenue District Office (RDO) or Tax Filing Center near your house and lot in the Philippines, you should first be prepared with the documents you need. Incomes are taxed differently, and so are the requirements for filing ITRs. Here’s what you need to compile if you belong in any of these three common categories, along with important deadlines to remember.

Annual ITR Filing

For Individuals Earning Purely Compensation Income 

This encompasses every resident citizen who gets compensation income from all sources, as well as resident alien and non-resident citizens with respect to compensation income within the country.

The deadline for filing is set on or before April 15 annually covering income for the preceding taxable year, the BIR said.

If you are under this category, you need to prepare the following:

Certificate of Income Tax Withheld on Compensation

If applicable, Tax Debit Memo and Proofs of Foreign Tax Credits

Previously filed ITR and proof of payment

Accomplished BIR Form 1700

For Individuals, Estates, and Trusts

You belong under this category if you are:

  • A resident citizen involved in trade, business, or practice of profession within and without the Philippines,
  • A resident alien, non-resident citizen, or non-resident alien involved in business or practice of profession within the country, or
  • A trustee of a trust engaged in trade or business
  • A guardian of a minor engaged in trade or business
  • An administrator of an estate engaged in trade or business

The deadline for filing annual ITR for this category is also on or before April 15. 

Meanwhile, these are what you need to prepare for filing:

· Account Information Form (AIF) or the Certificate of the independent Certified Public Accountant (CPA) with Audited Financial Statements if the gross annual sales, earnings, receipts, or output exceed three million pesos (P3,000,000.00)

· Account Information Form or Financial Statements not necessarily audited by an independent CPA if the gross annual sales, earnings, receipts, or output do not exceed P3,000,000.00 and are subject to graduated income tax rates under Section 24(A)(2)(a)

· Previously filed ITR and proof of payment

Accomplished BIR Form 1701

You need to further prepare these documents, if applicable:

  • BIR Form 2316 or Certificate of Income Tax Withheld on Compensation
  • BIR Form 2304 or Certificate of Income Payments Not Subjected to Withholding Tax
  • BIR Form 2307 or Certificate of Creditable Tax Withheld at Source
  • Duly Approved Tax Debit Memo
  • Proof of Foreign Tax Credits

For Corporations and Partnerships

Entities that need to file under this category include corporations, partnerships, joint-stock companies, joint accounts, and associations. This non-individual taxpayer needs to prepare the following documents for annual ITR processing:

· Account Information Form (AIF) or the Certificate of the independent CPA with Audited Financial Statements, if the gross annual sales, earnings, receipts or output exceed P3,000,000.

  • Previously filed ITR and proof of payment

Also, ready these documents if applicable:

  • BIR Form 2304 or Certificate of Income Payments Not Subjected to Withholding Tax
  • BIR Form 2307 or Certificate of Credible Tax Withheld at Source
  • Duly Approved Tax Debit Memo
  • Proof of Foreign Tax Credits
  • Proof of prior year’s excess tax credits

The category also follows the same deadline as the first two: on or before April 15 following the close of the taxpayer’s taxable year.

Quarterly ITR Filing

For Individuals, Estates, and Trusts Including Those With Mixed-Income 

You should come prepared to your Tax Filing Center with the following requirements, if applicable if you fall under this category:

  • BIR Form 2307 or Certificate of Creditable Tax Withheld at Source
  • Duly Approved Tax Debit Memo
  • Proof of other payment or payments made
  • Summary of Alphalist of Withholding Agents of Income Payments Subjected to Withholding Tax at Source

You must also accomplish BIR Form 1701Q and be mindful of the deadlines on or before May 15; on or before August 15, and on or before November 15 on the three quarters of the current taxable year.

For Corporations and Partnerships

Non-individual taxpayers like corporations and partnerships are asked for these documents for filing quarterly ITR:

  • BIR Form 2307 or Certificate of Creditable Tax Withheld at Source
  • Duly approved Tax Debit Memo
  • Previously filed ITR
  • Accomplished BIR Form 1702Q

The deadline for a corporate quarterly income tax return is set on or before the 60th day following the close of the quarters of the year.

What are the procedures for ITR filing?

BIR Office in Intramuros, Manila Photo by BusinessWorld
BIR Office in Intramuros, Manila Photo by BusinessWorld

Manual Process

If you are included in the individuals and corporations whose income is taxed, you should note that there are three modes available to process your ITRs. Different types of taxes are collected in almost the same process. For manual payment, here are the steps you should follow:

1. Fill up applicable fields in BIR Form according to your taxpayer category. (e.g.: BIR Form No. 1700 for individuals earning purely compensation income)

2. Proceed to the RDO or Tax Filing Center with your accomplished form and documentary requirements.

3. Get your copy of the duly stamped and validated form from the RDO.

Online Process

In 2020, the bureau said 94 percent are done through electronic payment channels. The BIR’s Electronic Filing and Payment System is therefore an easy way for you to file your ITR from the comfort of your home. Here are three easy steps to use the system.

1. Fill up applicable fields in the BIR Form according to your taxpayer category.

2. Click “Proceed to Payment” to pay electronically. Then, fill up the required fields in the “eFPS Payment Form” and click “Submit.”

3. Get payment confirmation for your successful online filing and payment from eFPS-AABs.

For “no payment” ITRs

If ITRs are refundable, break-even, exempt, and have no operation or transaction, they shall be filed with the concerned RDO. Late filing will be processed with an Authorized Agent Bank or Collection Officer for collection of penalties.

Key Takeaways

Taxation is a complicated topic but a necessary one. While tax deductions cause a little pinch in our adult selves who have a lot to shoulder financially, we fully understand that it is our social responsibility as Filipinos. Taxes are called the “lifeblood” of the government for a reason. It is where the funding for government expenditures is sourced, which makes public infrastructure, social services, and programs possible.

Infrastructure project funded by government through taxes Photo by Drive.ph
Infrastructure project funded by government through taxes Photo by Drive.ph

Filing and settling taxes might sound like a demanding process for some. Fortunately, processes are made easier with online options provided by BIR. Another good news: an expanded digitized tax collection is being eyed by the new BIR leadership which promises a more efficient collection system. It is one of the many developments taxpayers should look out for.

While there are online modes available, it is still advantageous if you live near RDOs for your immediate concerns on taxes. This is why investing in Camella Homes is a wise decision you can make as a responsible Filipino. Establishments and government offices are accessible to any Camella community to answer your needs for necessary transactions.

Come home to your Dream Home in Camella

Check out our catalog of house and lot for sale in the Philippines

Join The Discussion

Compare listings

Compare