Individual Taxpayers in the Philippines

Individual Taxpayers are natural persons with income derived from within the territorial jurisdiction of a taxing authority.  These individual taxpayers are classified as:

1.     Resident citizens of the Philippines

a.        Under Sec. I, Art. III of the Philippine Constitution , Filipino citizen is he who is/has

                                             i.            Born (by birth) with father and/or mother as Filipino Citizens;

                                            ii.            Born before January 17, 1973 of Filipino mother who elects Philippine citizenship upon reaching the age of majority; or

Natural-born citizens of the Philippines who:

Ø  Become citizens of a foreign country shall retain their Philippine citizenship upon taking their oath of allegiance to the Philippine Republic

Ø  Have lost their Philippine citizenship by reason of naturalization as citizens of a foreign country are hereby deemed to have re-acquired Philippine citizenship upon taking the said oath

Derivative citizenship

Ø  The unmarried child (illegitimate or illegitimate or adopted), below 18 years of age, of those who re-acquire Philippine citizenship, shall be deemed citizens of the Philippines

                                          iii.            Acquired Philippine citizenship after birth (naturalized) in accordance with Philippine Laws.

b.        An Alien is a foreign-born person who is not qualified to acquire Philippine citizenship by birth or after birth.

2.     Non-resident citizens of the Philippines.  He is a citizen who

a.        Establishes to the satisfaction of the Commissioner of Internal Revenue the fact of his physical presence abroad with a definite intention to reside therein; or

b.        Leaves the Philippines during the taxable year to reside abroad

                                                               i.      As an immigrant; or

                                                              ii.      For employment on a permanent basis; or

                                                            iii.      For work and derives income from abroad and whose employment thereat requires him to be physically abroad most of the time during the taxable year.

c.        Was previously a non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines.

§  He shall be considered a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to income derived from sources abroad until the date of his arrival in the Philippines.

d.        A citizen of the Philippines who shall have stayed outside the Philippines for one hundred eighty-three days (183) or more by the end of the year.

3.     Resident aliens

a.        Not a citizen of the Philippines, but residence is within the Philippines.

b.        Actually present in the Philippines and who are not mere transients or sojourners.

c.        An alien who lives in the Philippines with no definite intention as to his stay is a resident

Ø  One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient (non-resident).

Ø  One who comes to the Philippines for the purpose that requires extended stay for its accomplishment, so he makes his home temporarily in the Philippines, is a resident, regardless of his intention to return to his residence abroad.

4.     Non-resident aliens engaged in business in the Philippines

a.        Aliens who stayed in the Philippines for an aggregate period of more than 180 days during the taxable year;

b.        Aliens who have business income in the Philippines.

Trade or Business includes:

Ø Performance of the functions of a public office

Ø Performance of personal services in the Philippines (does not include performance of services by the taxpayer as an employee).

5.     Non-resident aliens not engaged in business in the Philippines, but with income from the Philippines

a.        Aliens who stayed in the Philippines for only 180 days or less,

b.        Aliens who have no business income derived in the Philippines

6.     SPECIAL ALIENS/  PREFERENTIAL TAX TREATMENT.  Income derived by ALIEN individuals EMPLOYED by

A.    Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies.  (RR 11-2010;  RMC 41-09 as amended)

·         FINAL Withholding Tax of 15%

·         FROM Gross income derived by alien individual Occupying Managerial OR Technical Positions in RHQ or ROHQ and Representative offices established in the Philippines by multinational companies as:

-  Salaries

-  Wages

-  Annuities

-  Compensation

-  Remuneration

-  Other emoluments such as honoraria and allowances, except income subject to fringe benefit tax

·         The same tax treatment shall apply to Filipinos employed by RHQ or ROHQ of multinational companies regardless of whether or not there is an alien executive occupying the same position.  Provided that such Filipino shall have the option to be taxed at either 15% of gross income or the regular rate on their taxable income in accordance with the tax code.

ELIGIBILITY (MUST meet ALL the following requirements):

1.     Position and Function Test

ü  Must occupy managerial or technical position and must be exercising such functions pertaining to said position.

2.     Compensation Threshold Test

-  The employee must have received or is due to received under a contract of employment, a gross taxable compensation income of at least P975,000 (whether or not this is actually received).  Provided that,

-  A change in the compensation income , as a consequence of which, the employee subsequently receiving less than the compensation threshold for the calendar year when the change becomes effective, result in the employee being subject to the regular income tax rate.

-  For purposes of computing the compensation threshold, gross compensation shall not include:

-  Retirement and/or separation benefits (whether taxable or not)

-  De minimis benefits

Provided that such benefits shall be considered in the determining the income tax due at the time of the employee’s retirement or separation.

3.     Exclusivity Test

-  The Filipino Managerial/Technical employee must be exclusively working for the RHQ or ROHQ as a regular employee and not just a consultant or contractual personnel.

-  EXCLUSIVITY means just having one employer at a time.

“Multinational Company”

-  A foreign firm or entity engaged in international trade with its affiliates or subsidiaries or branch offices in the Asia Pacific Region and other foreign markets

“Managerial Position (RMC 41-09 as amended)”

-  One who is vested with powers or prerogatives to lay down and execute management policies and/or employees.

“Technical Position (RMC 41-09 as amended)”

Ø  Limited only to positions that are:

Ø  Highly technical in nature, OR

Ø  Where there are no Filipinos who are competent, able and willing to perform the services for which the aliens are desired.

B.     Offshore Banking Units

An offshore banking unit (OBU) is a branch of a multi-national bank located in a financial center away from its home country. OBUs cannot accept deposits from the people of that country, only from other banks and OBUs.

C.    Petroleum contractors and subcontractors

An Alien individual who is a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor: Provided, however, that the same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by petroleum service contractor and subcontractor.

7.     SENIOR CITIZENS

·         Generally, qualified Senior Citizens deriving returnable income during the taxable year, whether from compensation or otherwise, are required to file their income tax returns and pay the tax as they file the return. 

·         However, if the returnable income of a Senior Citizen is in the nature of compensation income but he qualifies as a minimum wage earner under RA No. 9504, he shall be exempt from income tax on the said compensation income subject to the rules provided under Revenue Regulations No. 10‐2008 applicable to minimum wage earners. 

·         Likewise, if the aggregate amount of gross income earned by the Senior Citizen during the taxable year does not exceed the amount of his personal exemptions (basic and additional), he shall be exempt from income tax and shall not be required to file income tax return.

Taxation, Tax and Purposes of Taxation

Taxation is the act of levying a tax.  It’s the process or means by which the sovereign (independent State), through its law-making body (legislative branch), raises income to defray the necessary expenses of the government.

Tax are enforced proportional contributions from persons and property, levied by the State by virtue of its sovereignty for the support of the government and for all its public needs.  

Purposes of Taxation

1.     Primary Purpose – is to raise revenue for governmental needs; also called revenue purpose

2.     Secondary Purposes

a.     Compensatory purposes

1)    To reduce social inequality

2)    To encourage the growth of local industries

3)    To protect our local industries against unfair competition

b.     Regulatory purpose – to implement the police power of the State to promote the         general welfare 

Allowable Deduction for Non-Resident Alien Decedent (Estate Tax)

1.       Expenses, the deductible amount is pro-rata using the following formula:

With regard to a non-resident, not a citizen decedent, the ELITE allowable to him would only be a pro-rata share of his GE in the Philippines over his worldwide GE:

                                                   GE Philippines   x   ELITE world

                                                   GE World

       

2.       Vanishing deduction

3.       Transfer for public use

Not allowed as deductions are: -  medical expenses -  family home -  standard deduction, and -  amount received under R.A. 4917.

No deduction shall be allowed to non-resident alien decedent unless the executor, administrator, or any of the heirs would include in the return required to be filed all the property from within and outside the Philippines.

SUMMARY OF DEDUCTIONS

	Citizen or Resident Decedent	Non-resident Alien Decedent
1.  ELITE	Deductible	Deductible (pro-rated)
2. Transfers for public use	Deductible	Deductible
3.  Vanishing deduction	Deductible	Deductible
4.  Family home	Deductible	Nondeductible
5.  Standard deduction	Deductible	Nondeductible
6.  Medical expenses	Deductible	Nondeductible
7.  Amount received by heirs under RA 4917	Deductible	Nondeductible

DEDUCTIONS FROM THE GROSS ESTATE (Citizen and/or Resident Decedents)

 A.       ELITE (Expenses, Losses, Indebtedness, Taxes, etc.)

1. Funeral expenses

Actual Funeral expenses or 5% of the gross estate, whichever is lower, provided it does exceed P 200,000, shall be allowed as a deduction from the gross estate (common property, if applicable) of the decedent.  To be considered actual, the funeral expenses must be paid out of the estate, not by somebody or out of contributions from friends and relatives.  Supporting receipts or invoices or other evidence shall also be furnished.

Example of Funeral Expenses:

a)       mourning clothes (surviving spouse and unmarried minor children only)

b)      expenses of the wake preceding the burial including food and drinks

c)       fees for religious rites and ceremonies prior to interment

d)     cost of burial plot, tombstone, mausoleum but not their upkeep.  In case the deceased   owns a family estate or several burial lots, only the value corresponding to the plot   where he is buried is deductible.

e)       Publication and telecommunication charges for death notices

f)        interment and/or cremation charges

2. Judicial expenses

Judicial expenses refer to expenses of testamentary or intestate proceedings for the benefit of the estate, incurred during settlement of the estate supported by receipts or invoices or by a sworn statement of account issued and signed by the creditor in case of unpaid amounts.  Settlement period means not beyond the last day prescribed by law to file the estate tax return (6 months from death) or the extension thereof.

Example of Judicial Expenses:

a)       Actual judicial or court expenses

b)      Attorney’s fees

c)       Expenses of administration such as, but not limited to

-  Inventory taking of assets comprising the gross estate

-  Payment of debts of the estate

-  Distribution of the estate among the heirs.

-  Accountant’s fees

-  Fees of executor/administrator

-  Appraiser’s fees

-  Clerk’s hire

-  Cost of preserving and distributing the estate

-  Cost of string or maintaining the property of the estate

-  Brokerage fees

3. Indebtedness or Claims against the Estate

      These are debts or demands of pecuniary nature which could have been enforced against the deceased in his lifetime and could have been reduced to simple money terms.  The liability represents a personal obligation  of the deceased existing at the time of his death. The liability was contracted in good faith and for adequate and full consideration in money or money’s worth

Requisites in order to be allowed as a deduction:

a.        Must be valid in law and enforceable in court against him when he was alive

b.       It must not have been condoned by the creditor or the action to collect from the decedent must not have been prescribed.

c.        If with a debt instrument, it must be notarized, except for loans granted by financial institutions where notarization is not part of the business practice/policy of the financial institution-lender.

d.       If contracted within three (3) years before the death of the decedent, a statement under oath (by the executor/administrator) must be executed and must be attached therewith a statement showing the disposition of the proceeds of the loan. 

The following Unpaid Expenditures shall not be deductible from the gross estate under this category

a)       Funeral expenses

b)      Medical expenses

4. Claims against an insolvent person

        These are claims that are not collectible.  An insolvent is person whose properties are not sufficient to satisfy, whether fully or partially, his debts.  For purposes of estate taxation, a judicial declaration of insolvency is not required but the incapacity of the debtors to pay their obligation should be proven.  To be allowed as a deduction from the Gross Estate, the full amount owed by the insolvent must first be included in the decedent’s Gross Estate.  If the insolvent could only pay partial, the full amount owed shall be included in the Gross Estate, and the amount uncollectible shall be allowed as a deduction.

5. Unpaid mortgages or indebtedness on property

      This is a deduction allowed when the decedent leaves property encumbered by a mortgage or indebtedness contracted in good faith and for adequate and full consideration.  To be allowed as a deduction, his gross estate must include the fair market value of the property encumbered.  The amount allowed as a deduction would be the outstanding debt or mortgage.

6. Taxes

     These are unpaid taxes that accrued prior to the death of the decedent.  However, the following are not allowed as a deduction:

a)       Income tax on income received after death

b)      Property taxes accrued after death

c)       Estate tax

7. Losses

Include all losses incurred during the settlement of the estate arising from fires, storms, shipwreck or other casualties, or from robbery, theft or embezzlement.  The amount deductible is the value of the property lost.

Requisites to be allowed as a deduction:

a)       arising exclusively from:

a.        acts of God: fire, storm, shipwreck and other similar casualty

b.       acts of man:  robbery, theft, embezzlement

b)      not compensated by insurance or otherwise

c)       not claimed as a deduction in an income tax return of the estate subject to income tax

d)      occurred during the settlement of the estate and

e)       occurred before the last day for the payment of estate tax (six months after the death of the decedent)

B.       TRANSFERS FOR PUBLIC USE

*  Dispositions in a last will and testament or transfers to take effect after the death in favor of the:

1.       government of the Philippines

2.       any political subdivision thereof (e.g. barangay, province, city municipality)

*  for exclusively public purposes

C.       VANISHING DEDUCTION

*  Referred to as a deduction for “property previously taxed” in the Tax Code

*  It is an amount allowed to reduce the taxable estate of a decedent where the property:

1.       received by him from a prior decedent by gift, bequest, device or inheritance

2.       transferred to him by gift

3.       Has been the object of previous transfer taxation

*  Requisites for deduction:

1.       death – the present decedent died within 5 years from the date of death of the prior decedent or date of gift

2.       identity of property – the property with respect to which deduction is sought can be identified as the one received from the prior decedent, or from the donor, or as the property acquired in exchange for the original property so received

3.       located in the Philippines – the property on which vanishing deduction is being claimed must be located in the Philippines

4.       inclusion of the property – the property must have formed part of the gross estate situated in the Philippines of the prior decedent or have been included in the total amount of the gifts of the donor made within 5 years prior to the present decedent’s death

5.       previous taxation of the property – the estate tax on the prior succession, or the donor’s tax on the gift must have been finally determined and paid by the prior decedent or by the donor as the case maybe and

6.       no previous vanishing deduction on the property – no such deduction on the property, or the property given in exchange therefore, was allowed in determining the value of the net estate of the prior decedent.

                Pro-forma computation of vanishing deduction:

Value to take***	Pxx
Less: Paid mortgage (1st deduction)	(xx)
Initial basis	xx
Less: Proportionate expenses(2nd deduction):
Initial basis x ELITE plus transfer for public use Gross estate	(xx)
Final basis	xx
x   vanishing deduction percentage	%
Vanishing Deduction	Pxx

        ***Value to take is the lower amount between the value of the property in the gross estate of the prior decedent or value of the gift and value of the same property  in the gross estate of the present decedent.

                Vanishing deduction rates:

                If the period from receipt to decedent’s death is                Rate %

                                Within one year                                                        100

                                Beyond one year to 2 years                                        80

                                Beyond 2 years to 3 years                                          60

                                Beyond 3 years to 4 years                                          40

                                Beyond 4 years to 5 years                                          20

D.      Amounts received by heirs under RA 4917

*  Any amount received by the heirs from the decedent’s employer as a consequence of the death of the decedent-employee in accordance with R.A. No. 4917, provided that the amount of separation benefit is included as part of the gross estate of the decedent.

E.       Standard deduction

*  The law allows a standard deduction of P 1,000,000; no qualification, condition nor requisite whatsoever.

F.       Family Home

*  Requisites for deduction:

1.       the decedent was married or if single, was a head of the family

2.       along with the decedent, either of the following persons must be dwelling in the family home:

a.        spouse

b.       parents or ascendants

c.        children or descendants

d.       brothers and sisters

3.       the family home as well as the land on which it stands must be owned by the decedent.  Therefore, the FMV of the family home should have been included in the computation of the decedent’s GE.

4.       the Barangay captain of the locality where it is located must certify it as a family home.

*  The amount of family home allowable as a deduction would be whichever is lower of:

1.       P 1,000,000 or

2.       FMV, at the time of the decedent’s death, of the family home and the land on which it stands

G.       Medical expenses

*  Requisites for deduction:

1.       incurred by the decedent within 1 year prior to his death and

2.       substantiated by receipts

*  The amount allowed as a deduction would be whichever is lower of:

1.       actual medical expenses incurred by the decedent

2.       P 500,000

H.      Share of Surviving Spouse