Summary
Highlights
Mixed-income earners, those with both compensation and self-employment income, have different tax options. Compensation income is subject to graduated tax rates, while business or professional income can be taxed at either graduated rates or an 8% income tax rate on gross receipts/sales and other non-operating income. The 8% rate applies if gross sales/receipts and non-operating income do not exceed the VAT threshold of 3 million pesos. Exceeding this threshold mandates the graduated income tax rate. The 250,000 allowance from compensation income cannot be applied to business income if the 8% option is chosen.
Mr. Mag, a financial controller and convenience store owner, earned 1,500,000 in compensation and had 2,400,000 in gross sales from his business. Upon opting for the 8% income tax rate for his business, his compensation tax was 313,000 pesos and his business tax was 200,000 pesos, totaling 513,000 pesos. The 8% option is for income from business and is in lieu of graduated income tax rates and percentage tax (3% for most businesses instead of 12% VAT).
If Mr. Mag had not opted for the 8% rate, his total taxable income from both compensation and business would be combined and taxed under the graduated rates, resulting in a different total tax due. This example shows that selecting the 8% option can sometimes offer an advantage.
GOCCs, government agencies, and instrumentalities are generally subject to corporate tax rates if they engage in proprietary functions. However, specific GOCCs like GSIS, SSS, PhilHealth, and local water districts are exempt from taxes under certain provisions of the TRAIN law, despite performing proprietary functions.
Non-resident aliens engaged in trade or business in the Philippines are subject to graduated tax rates. Those not engaged in trade or business are subject to a final tax of 25% on their entire income from Philippine sources. Preferential tax rates for employees of multinational companies, regional operating headquarters, offshore banking units, and petroleum service contractors were discussed but noted as having been vetoed by the president, making them subject to regular income tax rates.
Generally, passive income is taxed at a final rate of 20%, as it's typically seasonal or non-regular. Examples include interest on bank deposits, royalties (except for books, literary works, and musical compositions which are 10%), prizes (over 10,000 pesos are 20%), winnings (except PCSO and Lotto winnings below 10,000 pesos), and cash/property dividends (10%). Capital gains from the sale of unlisted shares of stock are 15%, while capital gains from real property sales are 6%.
Various items are excluded from gross income, meaning they are not subject to income tax. These include life insurance proceeds, amounts received as return of premium, gifts, bequests, devices, compensation for injuries or sickness, income exempt under treaty, retirement benefits, gratuities, income from foreign governments, certain prizes and awards (cultural/sports, up to 90,000 for 13th month pay), de minimis benefits, and contributions to SSS, GSIS, PhilHealth, etc.