QuestionsQuestions (Act No. 2833)
All “entire net income” received in the preceding calendar year from all sources by every individual citizen or resident is taxed at a normal rate of 2%. (Sec. 1[a])
A nonresident alien is taxed with a normal tax of 2% on entire net income received in the preceding calendar year from all sources within the Philippine Islands, including specified interest items. (Sec. 1[a])
In addition to the 2% normal tax, an additional income tax is imposed on the total net income in graduated brackets: 1% for the amount exceeding ₱20,000 up to ₱40,000; 2% for exceeding ₱40,000 up to ₱60,000; continuing up to 13% for amounts exceeding ₱2,000,000. (Sec. 1[b])
Dividends or net earnings subject to the tax in Sec. 10(a) are included as income for purposes of the additional tax. (Sec. 1[b], final paragraph)
Taxable net income includes gains, profits, and income from salaries/wages/compensation; professions/vocations/business/trade/commerce/sales or dealings in property; interest, rent, dividends, securities; and income derived from any source whatever, subject to exemptions and deductions. (Sec. 2[a])
Income received by estates during administration or settlement is subject to normal and additional tax and is taxed to the estate. Income of estates or property held in trust is also taxed, with the tax assessment generally to fiduciaries unless returned for tax by the beneficiary; if distributed annually/regularly among existing heirs/legatees, the rate and computation are based on the individual share. (Sec. 2[b])
For purposes of additional tax, an individual’s taxable income includes his share of corporate gains/profits that would be entitled to if divided/distributed, whether actually distributed or not, when accumulated/retained fraudulently to evade the additional tax. Holding company status or accumulation beyond reasonable needs is prima facie evidence of fraudulent purpose, subject to certification by the Secretary of Finance about unreasonableness. (Sec. 3)
Exempt incomes include: proceeds of life insurance policies paid to beneficiaries upon death; amounts received as return of premium under life insurance/endowment/annuity contracts; value of property acquired by gift/bequest/devise/descent (but income from such property is included); and certain interest on obligations of the U.S. and Philippine Governments to the extent provided by their authorizing acts. (Sec. 4[a]-[d])
The provided text lists deductions such as necessary business expenses; interest paid on indebtedness (with exclusions for exempt-interest securities); taxes paid; losses sustained in business and certain casualty/theft losses (uncompensated); losses from profit transactions not connected with business limited to profits; debts ascertained worthless and charged off; depreciation allowance; oil and gas well allowances and mine depletion allowances; and certain charitable/religious/scientific/educational contributions limited to 5% of taxable net income as computed without that deduction. (Sec. 5[a])
For normal tax only, the exemption is ₱6,000 plus ₱2,000 if the person is head of a family or married man with wife living with him, or plus ₱2,000 if married woman with husband living with her; but the extra ₱2,000 cannot be deducted by both spouses, and only one ₱8,000 exemption applies to the aggregate income of both spouses living together. (Sec. 7)
If the taxpayer is the head of a family, there is an additional exemption of ₱400 for each legitimate, recognized natural or adopted child dependent upon the taxpayer, if under 18, or incapable of self-support due to mental or physical defect. (Sec. 7)
On or before March 1, 1920, and on or before March 1 each year thereafter, a true and accurate return under oath must be filed if the person has an income of ₱6,000 or over for the taxable year. (Sec. 8[b])
Nonresident alien individuals receive the benefit of deductions and credits only by filing a true and accurate return; if the collector is not provided such a return (failure to file), the Collector of Internal Revenue shall collect the tax on such income. (Sec. 6[c])
General co-partnerships duly registered are liable for income tax only in their individual capacity; the share of profits attributable to each partner is returned for taxation and tax is paid under the law. (Sec. 8[d])
Persons, corporations, partnerships, trustees, employers, and certain government officers having control/receipt/custody/payment of fixed or determinable annual or periodical gains, profits, and income of a nonresident alien (other than dividends/net profits subject to Sec. 10[a]) are required to deduct and withhold a sum sufficient to pay the normal tax and then return/pay the withheld tax by March 1 and on or before the tax payment time, with personal liability on the withholding agent. (Sec. 9[b])
Corporations organized in the Philippine Islands are taxed at 2% on total net income from all sources; foreign corporations are taxed at 2% on total net income received from all sources within the Philippine Islands, including dividends/net profits subject to the subsection. (Sec. 10[a])
The provided text exempts, among others: labor/agricultural/horticultural organizations; certain mutual savings/cooperative banks; fraternal beneficiary societies (lodge system, member-exclusive benefit); loan and building associations under the Corporation Law; cemetery companies for members; corporations/associations for religious/charitable/scientific/educational purposes (with no net income inuring to private persons) but with their property income rules; business leagues/chambers/boards of trade not organized for profit; civic leagues for social welfare; certain pleasure/recreation clubs not for profit; mutual insurers of a purely local character; certain farmers’ associations as sales agents; holding-title corporations that turn over entire income to exempt organizations; and joint-stock land banks as to specified bond/debenture income. (Sec. 11[a])