Pure Compensation Income Earner

Compensation Income

It means all remuneration for services performed by an employee for his employer under an employer-
employee relationship, unless specifically excluded by the Code.

Remuneration means the money people get paid with for the work or service they render. Thus, salaries,
wages, emoluments and honoraria, allowances, commissions (e.g., transportation, representation,
entertainment and the like); fees including director's fees, if the director is, at the same time, an
employee of the employer/corporation; taxable bonuses and fringe benefits are considered as
compensation.

Pure Compensation Income Earners

These are Individuals whose source of income is purely derived from an employer-employee relationship
or employment. So other than the income they get from employment, they don’t have other taxable
sources like waiters, salesclerk, receptionist and so on.

How can you determine if you really are an employee?

1. There is power to hire

2. There is a selection process
3. Payment of Salary
4. And Power to dismiss by the employer

The annual income tax due of pure compensation income earner is computed only by means of the
updated graduated income tax table:

AMOUNT OF NET TAXABLE INCOME RATE

Over But Not Over

- ₱250,000 0%

₱250,000 ₱400,000 20% of the excess over P250,000

₱400,000 ₱800,000 P30,000 + 25% of the excess over P400,000

₱800,000 ₱2,000,000 P130,000 + 30% of the excess over P800,000

₱2,000,000 ₱8,000,000 P490,000 + 32% of the excess over P2,000,000

₱8,000,000 P2,410,000 + 35% of the excess over P8,000,000

Pure Business or Professional Income Earner

Or self-employed and professionals

These are persons who report income earned from self-employment. They control who they work for,
how the work is done, and when it is done. It includes those hired under a contract of service or job
order, and professionals whose income is derived purely from the practice of profession and not under an
employer – employee relationship. these professionals are formally certified by a professional body
belonging to a specific profession by, virtue of having completed a required examination or course of
studies and/or practice, whose competence can usually be measured against an established set of
standards, such as doctors, lawyers, engineers, architects, CPAs, and teachers. It also refers to persons
who engage in some art or sport for money, as a means of livelihood, rather than as a hobby such as
athletes, artists, and entertainers.

The annual income tax due of pure business or professional earner is computed either by means of the
updated graduated income tax table or 8% on gross sales or gross receipts in excess of 250,000. You
have to signify your intent on the first quarter of the percentage or income tax return if you prefer to be
taxed at 8%. If you did not signify your intent, then you are subject to the graduated income tax rate
and liable to pay 3% percentage tax.

Mixed Income Earners

These are Individuals earning compensation income from employment, and income from business,
practice of profession and/or other sources aside from employment
Source of Income

The source of an income is the property, activity or service that produced the income. For the source of
income to be considered as coming from the Philippines, it is sufficient that the income is derived from
activity within the country.

The source of income relates not to the physical sourcing of a flow of money or the physical situs of
payment but rather to the property, activity or service which produced the income.

In this case, the concern is whether the source of income comes from within the Philippines or without or
outside.

TAXPAYER SOURCES OF TAXABLE INCOME TAX BASE

RC Within and Without Net Income

NRC, RA, NRA-ETB Within only Net Income

NRA-NETB Within only Gross Income

Income Tax on Corporations

Corporation

It is an artificial being created by operation of law and has a juridical personality that is separate from its
stockholders and/or other corporations to which it is connected.

The term ‘corporation’ shall include one person corporations, partnerships, no matter how created or
organized, joint-stock companies, joint accounts, association, 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 consortium agreement under a service contract with the
Government.

Hence, the term corporation includes profit-oriented and non-profit institutions such as charitable
institutions, cooperatives, government agencies and instrumentalities, associations, leagues, civic or
religious and other organizations.

Just like in individual taxation, it is important to determine the source of income of corporate taxpayers—
whether from within the Philippines or without since not all corporate taxpayers are taxed on all of their
income.

Classification of Corporations

Why do we need to classify corporations?

The reason of determining the classification of these corporations is their taxability. Their taxability differs
on what type of corporation they classify as.

1. Domestic Corporation

A corporation that is organized in accordance with Philippine Laws. A domestic corporation is taxable on
all income derived from sources within and without the Philippines

2. Foreign Corporation

A corporation organized, authorized, or existing under the laws of any foreign country. A foreign
corporation, whether resident or non-resident, is taxed only on income derived from sources within the
Philippines.

Types of Foreign Corporation

a. Resident Foreign Corporation (RFC)

- A foreign Corporation which operates and conducts business in the Philippines through a
permanent establishment.
- a corporation organized, authorized, or existing under the laws of any foreign country
engaged in trade or business within the Philippines, shall be subject to an income tax
equivalent to 25% regular corporate tax on Philippine taxable income

b. Non-resident Foreign Corporation (NRFC)

- A foreign corporation which does not operate or conduct business in the Philippines.
- A corporation organized, authorized, or existing under the laws of any foreign country
not engaged in trade or business within the Philippines, shall be subject to an income tax
equivalent to 25% final tax on Philippine gross income.
A corporation that incorporates in the Philippines is a domestic corporation under the incorporation test
even if the same is controlled by foreigners.

A foreign corporation that transacts business with residents through resident branch is taxable on such
transactions as a resident foreign corporation through its branch. However, if it transacts directly to
residents outside its branch, it is taxable as non-resident foreign corporation on the direct transaction