PART II Chapter 2: Classification of Income Taxpayers

I. Scope of Income Taxation1. A taxpayer is any person subject to tax imposed by this Title. 2. A person is an individual, a trust, estate or corporation.3. A person liable to tax has been held to be a person subject to tax. It imposes a legal obligation or duty

to pay tax. A withholding agent should be regarded as a party in interest or as a person having sufficient legal interest to bring a suit for refund of taxes he believes were illegally or erroneously collected from him.

II. Individual Taxpayers 1. Citizens: Generally, a citizen has only one tax status during a calendar year. However, it is possible for a

citizen to have dual status for income tax purposes. a. A resident citizen of the Philippines is taxable on all income derived from sources within and

without the Philippines. This is because of the protection he gets from the Philippines government even when he is outside the Philippines.

b. A non-resident citizen is taxable only on his income derived from sources within the Philippines. There are three types on non-resident citizens: immigrants, employees of a foreign entity on a permanent basis and overseas contract workers.

2. Alien a. Resident alien: A resident alien is an individual whose residence is within the Philippines and who

is not a citizen thereof. A resident alien is taxable only on income derived from sources within the Philippines.

b. A non-resident alien is an individual whose residence is not within the Philippines and who is not a citizen thereof. i. Engaged in trade or business: If the aggregate period of his stay in the Philippines is more than

180 days during any calendar year, he shall be deemed as non-resident alien doing business in the Philippines. He is taxed on his income from sources within the Philippines at the graduated income tax rates of 5% to 32% while his passive investment income shall generally be subject to 20% final tax.

ii. Not engaged in trade or business: If the aggregate period of the non-resident alien’s stay in the Philippines does not exceed 180 days during any calendar year, he shall be deemed as non-resident alien not engaged in trade or business in the Philippines. His compensation income, business/professional income, capital gain, passive investment income and other income from sources within the Philippines is taxed at a flat rate of 25% but capital gains shall be subject to capital gains tax.

3. General Professional Partnership a. A general professional partnership is a partnership formed by persons for the sole purpose of

exercising their common profession, no part of income of which is derived from engaging in trade or business.

b. A GPP is not considered as a taxable entity for income tax purposes. The partners themselves are liable for the payment of income tax computed in their respective distributive shares of the partnership profit.

c. Share of partners in the partnership profit shall be deemed distributed to the partners in the year the profit is earned. The principle of constructive receipt of income or profit is being applied to undistributed profits of general professional partnerships.

d. Professional fee of GPP is exempt from expanded withholding tax.

III. Estates and Trusts 1. An estate is created by operation of law, when an individual dies, leaving properties to his compulsory

or other heirs. A trust is legal arrangement whereby the owner of property (trustor) transfers ownership to a person (trustee) who is to hold and control the property belonging to the owner’s instructions for the benefit of a designated persons or beneficiaries.

2. Taxable estates and trusts are taxed in the same manner as an individual. It is entitled only to personal exemption equivalent to a single individual in the amount of Php20, 000.

3. If trust were an employee’s trust, its income would be exempt from income tax.

IV. Corporations 1. A corporation shall include partnerships, no matter how created or organized, joint-stock companies,

joint accounts, associations or insurance companies but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal, and other energy operations pursuant to an operating or consortium agreement under a service contract with the government. a. A corporation is an artificial being created by operation of law having the right of succession and

the powers, attributes and properties authorized by law, implied therefrom or incident to its existence.

b. There is co-ownership whenever the ownership of an undivided thing or right belongs to two persons. It is not a juridical person. It is not considered as a separate taxable entity. For income tax purposes, individual co-owners are liable to income tax based on their share of the income from the property owned in common by them.

c. By the contract of partnership, two or more persons bind themselves to contribute money, property or industry to a common fund with the intention of dividing profits among themselves. Two or more persons may also form a partnership for the exercise of a profession.

2. Domestic corporation: The term domestic when applied to a corporation means created or organized in the Philippines or under its laws. A domestic corporation is taxable on all income derived from sources within and without the Philippines.

3. Foreign corporation: The term foreign when applied to a corporation means a corporation which is not domestic.

4. Resident foreign corporation: It is a foreign corporation engaged in trade or business within the Philippines.

5. Non-resident foreign corporation: It is a foreign corporation not engaged in trade or business within the Philippines.