Patrick is a successful businessman in the United States and he is a sole proprietor of a supermarket which has a gross sales of $10 million and an annual income of $3 million. He went to the Philippines on a visit and, in a party, he saw Atty. Agaton who boasts of being a tax expert. Patrick asks Atty. Agaton: if he (Patrick) decides to reacquire his Philippine citizenship under RA 9225, establish residence in this country, and open a supermarket in Makati City, will the BIR tax him on the income he earns from his U.S. business? If you were Atty. Agaton, what advice will you give Patrick? (5%)
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Yes, the BIR will tax Patrick on the income he earns from his U.S. business once he reacquires Philippine citizenship and establishes residence in the Philippines. Under Section 23(A) of the NIRC, a resident citizen is taxable on all
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How is a resident citizen taxed on income under Section 23(A) of the National Internal Revenue Code?
Under Section 23(A) of the Tax Code, a resident citizen is taxable on all income derived from sources within and without the Philippines.
What mechanism in the NIRC allows a resident citizen to alleviate double taxation on foreign-sourced income?
Section 34 of the Tax Code allows resident citizens to claim foreign income taxes paid as a tax credit or tax deduction.
How does reacquiring Philippine citizenship under RA 9225 combined with Philippine residence affect tax status?
Reacquiring citizenship under RA 9225 and establishing residence classifies the taxpayer as a resident citizen subject to worldwide taxation.
How is a non-resident citizen taxed under Philippine internal revenue laws differently from a resident citizen?
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What happens to foreign income taxes paid by a resident citizen if the foreign tax credit limitation is reached?
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1. Worldwide Income Principle
Under Section 23(A) of the National Internal Revenue Code, a resident citizen is taxable on all income derived from sources within and without the Philippines. Unlike non-resident citizens or foreign nationals who are taxed only on income sourced within Philippine territory, a Filipino citizen residing in the Philippines must declare global earnings. Consequently, reacquiring Philippine citizenship under Republic Act Number 9225 and establishing permanent residence subjects all foreign business income, including profits earned from United States enterprises, to regular Philippine corporate or individual income tax rates.
2. Foreign Tax Credit
To mitigate international double taxation arising from the worldwide taxation principle, Section 34(C)(3) of the Tax Code allows resident citizens to claim a foreign tax credit. A resident citizen who pays income taxes to a foreign government, such as the United States Internal Revenue Service, may credit those foreign tax payments against Philippine income tax liabilities, subject to statutory limitations under Section 34. Alternatively, the taxpayer may elect to claim foreign income taxes paid as a deductible business expense, depending on which option yields the lower net tax liability.
3. Dual Citizenship Status
Under Republic Act Number 9225, also known as the Citizenship Retention and Re-acquisition Act of 2003, natural-born Filipinos who lost their citizenship through foreign naturalization may reacquire Philippine citizenship. However, for tax purposes, reacquiring citizenship coupled with establishing physical residence in the Philippines classifies the individual as a resident citizen. Residence is determined by physical presence and intent to reside permanently. Once classified as a resident citizen, the individual loses the tax exemption privileges granted to non-resident citizens regarding income derived from foreign sources.