Under the former system of income taxation, the liability to income tax was based on citizenship. Filipino citizens were required to pay an income tax on their worldwide income (i.e. which means incomes earned from the Philippines and from abroad.) This system required nonresident Filipinos to pay an income tax on their income earned abroad to their country of residence, as well as to the Philippine government. This led to the taxation of the same income twice. The provision for a deduction of the foreign tax was the only means available under the old law to avoid double taxation.

The CTRP changed the citizenship rule into the residence rule. By virtue of this amendment, the Philippines has aligned its income tax system with most of the countries around the world (except the United States and Mexico which remain to apply the citizenship principle). Under Sec. 23 of (RA) 8424, the basis of income taxation is as follows:

A) A resident citizen of the Philippines is taxable on his worldwide income, i.e. income earned from within and outside the Philippines.

B) A nonresident citizen of the Philippines is taxable only on his income, which is earned from the Philippines. An overseas contract worker falls under this classification including seamen working for a foreign vessel which is engaged in international trade.

C) An alien individual is taxable on his income derived from sources within the Philippines.

D) A domestic corporation is taxable on its worldwide income.

E) A foreign corporation is taxable only on its income derived from sources within the Philippines.

To clearly illustrate, the following are the major changes effected: