I. Introduction to tax system in the Philippines
The laws governing taxation in the Philippines are contained within the National Internal Revenue Code. This code underwent substantial revision with passage of the Tax Reform Act of 1997. This law took effect on January 1, 1998.
Taxation is administered through the Bureau of Internal Revenue which comes under the Department of Finance. The chief executive of the Bureau of Internal Revenue is the Commissioner who has exclusive and original jurisdiction to interpret the provisions of the code and other tax laws. The commissioner also has the powers to decide disputed assessments, grant refunds of taxes, fees and other charges and penalties, modify payment of any internal revenue tax and abate or cancel a tax liability. Taxpayers can appeal decisions by the Commissioner directly to the Court of Tax Appeals.
II. Primary tax incentives
A. Tax holiday
The Omnibus Investments Code grants to enterprises that have registered with the Board of Investments and that qualify under the annual Investments Priority Plan entitlements to tax holidays of either four or six years. In addition, they are granted tax credits for purchase of Philippine-made capital equipment and raw materials.
B. Special Economic Zones
There are over thirty special economic zones throughout the Philippines where export manufacturing firms are encouraged to start operations. Under the Philippine Export Zone Authority Law, a special economic zone registered enterprise can, in lieu of all other national and local taxes, pay a tax of 5% of its gross income.
A firm that has registered under the Omnibus Investments Code that is located and registered to do business within a special economic zone can have a tax holiday for the first four or six years of its operations, followed by a 5% tax thereafter. The exemption from national taxes covers all internal revenue taxes, including the Value Added Tax.
III. Tax treaty with the United States
The Philippines has tax treaties with many countries, including the United States, in order to minimize the effects of double taxation. The business profits of a resident of another country with whom the Philippines has a tax treaty are taxable in the Philippines only if the resident has a permanent establishment in the Philippines to which the profits are attributable.
IV. Primary types of taxation
A. Individual Income Tax
Residents engaged in trade or business are taxed upon their net income (gross income less allowable deductions and personal exemptions) according to a schedule of rates ranging from 3% to 33%. The maximum rate will be reduced to 32% on January 1, 2000. Residency tests are used to determine resident alien status where the resident alien falls under the Individual Income Tax schedule of rates.
Personal exemptions of the following amounts are allowed on the individual income tax return:
Head of family
An additional 25,000 pesos exemption is given for each of the first four additional dependents.
B. Passive income
A final tax of 20% is imposed on interest income. This tax is withheld at the source. Exceptions to this are:
i. Interest income from a depositary bank with a Foreign Currency Deposit Unit is subject to a final tax rate of 7.5%.
ii. Philippine long term investments of over five years are exempt from tax.
A final tax of 10% is imposed on cash or property dividends from domestic corporations, joint stock companies, insurance or mutual funds, or regional operating headquarters of multinational corporations.
The distributable net income, after tax, of a partnership is subject to the same final tax as dividends.
3. Capital gains
The tax code imposes a final tax of 5% on net capital gains from the sale of stock in a domestic corporation up to 100,000 pesos. The tax is 10% for any income over 100,000 pesos. If the stock is stock exchange listed, a transfer tax of 0.5% is also imposed.
4. Fringe benefits
Fringe benefits, such as housing, expense accounts, vehicles, household personnel, membership fees and educational fees are taxable under the fringe benefits tax and are payable by the employer, who is responsible for withholding it and remitting it to the government. The fringe benefits tax is 33% (going to 32% on January 1, 2000) of the grossed-up monetary value of the fringe benefits given to the employee.
C. Corporation tax
Resident foreign corporations engaged in trade or business in the Philippines are taxed at the same rates as domestic corporations.
The corporation income tax rate is currently 30%.
Effective January 1, 2000, the tax code includes an option for corporations to be taxed at a rate of 15% of gross income if the President of the Philippines chooses to enact this option. If the option is granted by the President, only firms whose proportion of the cost of sales or receipts from all sources does not exceed 55% may exercise the option. This method of taxation, once elected, shall be irrevocable for three consecutive years.
Under the Tax Reform Act, the Philippines has also established a Minimum Corporate Income Tax. Subsequent to the fourth taxable year after a corporation has started its business, a minimum corporate income tax of 2% of the gross income is imposed if this amount is greater than the regularly computed tax. This amount can be carried forward and credited against the normal income tax for the three immediately succeeding taxable years.
D. Value Added Tax (VAT)
The VAT is equivalent to 12% of the gross selling price or gross value in money of goods or properties sold, bartered or exchanged. Any excise tax on these goods is also part of the gross selling price. In the case of imported goods, VAT is based on the total value of the goods as determined by the Bureau of Customs plus customs duties, excise taxes and incidental charges. The VAT is an indirect tax. While the obligation to collect and remit rests with the seller, the cost of the tax may be passed on to the buyer, transferee or lessee of the goods, properties or services. A VAT registered entity may credit the VAT paid on purchases of other goods and services against the tax on its current period sales of goods or services. If the amount of input tax is greater than the amount of output tax, the excess may be credited against succeeding period output VAT. VAT registered entities are required to issue an invoice or receipt for every sale and, in addition to regularly required accounting records, they must maintain subsidiary sales and purchase journals exclusively for VAT purposes. VAT reports must be submitted on a quarterly basis, twenty-five days after the end of the quarter. VAT payments must be made on a monthly basis.
V. Other taxes
Percentage tax (primarily for non-VAT registered entities
Documentary stamp tax
Estate and donor (gift) tax
1. Domestic corporations are taxed at 30% of annual taxable income from worldwide sources with option for 15% tax on gross income subject to certain conditions. Domestic corporations are those established under the laws of the Philippines and include foreign-owned corporations, otherwise known as subsidiaries.
2. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable on Philippine-sourced income at the same rates as domestic corporations. Such foreign corporation engaged in trade or business in the Philippines (also called resident foreign corporation) is taxed based on net income with the same option to pay 15% tax on gross income. On the other hand, a foreign corporation not engaged in business or trade in the Philippines (also known as a nonresident foreign corporation) is taxed based on gross income received.
3. Profits remitted by a branch of a foreign corporation to its home office are taxed at the rate of 15%. However, this tax does not apply to a Philippine branch registered with PEZA. Dividends declared by a domestic corporation to its foreign parent are generally taxed at 30%. However, if the home country of the recipient corporation allows an additional credit of 17% as tax deemed paid in the Philippines, the tax is reduced to 15%. Dividends remitted to countries that do not impose a tax on offshore dividends qualify for this rate. Under the Philippine tax treaties with Netherlands, Japan, Germany, Korea and Austria, a preferential tax of 10% on branch profit remittances is granted. Furthermore, under the tax treaties with these countries, dividends paid are subject to 10% tax if the payor-subsidiary is registered with the BOI or if the beneficial owner of the dividends is a company which holds a certain percentage of the capital of the payor subsidiary. Otherwise, the tax on dividends is 15%.
4. All corporations, whether domestic or foreign, are subject to capital gains tax on the sale of shares of stock, in the same manner as individual taxpayers. Other income items such as interest and royalties are taxed at various rates. Dividends received by a domestic or resident foreign corporation from a domestic corporation are exempt from tax.
A minimum corporate income tax of 2% of the gross income as of the end of the taxable year is imposed on a corporation which is subject to normal income tax of 30% beginning on the fourth taxable year immediately following the year in which such corporation was registered with the Bureau of Internal Revenue, when the minimum income tax is greater than the normal income tax for the taxable year.
5. Any excess of the minimum corporate income tax over the normal income tax as computed shall be carried forward and credited against the normal income tax for the three immediately succeeding taxable years. Every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation by permitting earnings and profits to accumulate instead of being divided or distributed, is taxed at the rate of 10% for each taxable year on the improperly accumulated taxable income.
6. In general, an employer (individual or corporation) shall pay a final tax of 30% on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file) unless the fringe benefit is required by nature of, or necessary to the trade, business or profession of the employer.
Local tax on certain businesses
1. Manufacturers, wholesalers, exporters and contractors are subject to graduated taxes on certain amounts of sales/gross receipts and percentage taxes at maximum rates ranging from .375% to .75% on the amounts not subject to graduated taxes, depending on the place where business is conducted. For essential commodities, the rates are 50% lower. Retailers are subject to 2% tax if their gross receipts are PhP400,000 or less and to 1% tax if in excess of PhP400,000.
2. Banks and other financial institutions- percentage tax at maximum rates ranging from .50% to .75% depending on the locality of the business.
3. Others varying rates
Aside from the above business taxes, there are other taxes
levied in the Philippines such as:
a. Real estate tax
b. Stamp tax on certain documents, instruments and related transactions such as issuance of shares of stock, evidence of indebtedness, transfer of real property, lease contracts, insurance policies, etc..
c. Community tax
d. Overseas communications tax
VALUE ADDED TAX
1. Twelve percent (12%) VAT is imposed on importation of goods and sale, barter, exchange or lease of goods, properties and services in the Philippines, subject to certain exceptions. Goods or properties mean all tangible and intangible objects, including real property, patents, trademarks and similar rights and movable and personal goods. Services cover performance of all kinds of services in the Philippines for a fee. Exports are generally subject to 0% VAT. VAT exempt goods include such items as books, fertilizers, livestock and poultry feeds and agricultural and marine food products in their original state.
2. Gross receipts tax on certain businesses:.
a. Bank and other non-bank
financial intermediaries 0% to 5%
b. Life insurance companies 5%
c. Common passenger carriers 3%
d. Electric, gas and water utilities 2%
e. Others ranging from 3% to 30%
3. Excise tax on alcohol, tobacco, petroleum and mineral products, cinematographic films, automobiles, jewelry, etc. at varying rates.
1. Taxable income from employment, business, trade and exercise of profession including casual gains, profits, and prizes of PhP10,000 or less; except items of income subject to final tax and special treatment, e.g. capital gains and passive income mentioned in items 4 and 5 below, derived by resident citizens from all sources within and without the Philippines are subject to the graduated tax rates of 5% to 32%. The top rate of 32% applies to taxable income in excess of PhP500,000. Resident aliens and non-resident citizens are subject to the same graduated tax rates but only for income derived from all sources within the Philippines.
2. Non-resident aliens are taxed at 25% of gross income from sources within the Philippines if their stay within the country does not exceed 180 days in the calendar year. Otherwise, they are taxed on the basis of graduated rates as in (1) above.
3. Aliens who are employed by regional or area or regional operating headquarters of multinational corporations, representative offices, offshore banking units, petroleum service contractors and subcontractors are subject to income tax at 15% of their gross income from such employers (e.g. salaries, annuities, honoraria and allowances).
4. Net capital gains realized during each taxable year from the sales of shares of domestic stocks not traded in the Philippine Stock Exchange (PSE) are taxed at the rate of 5% on the first PhP100,000 gains and 10% on the excess over PhP100,000. For domestic shares listed and traded in the PSE, the tax is 1/2 of 1% of the gross selling price or gross value in money of the shares of stock sold. Likewise, there is a tax on shares of stock sold, exchanged or otherwise disposed through initial public offering at the rates of 1%, 2% and 4%, depending on the proportion of the shares sold, exchanged or otherwise disposed to the total outstanding shares after listing of the shares of closely held corporations. Capital gains on sale of real property are taxed at 6% of gross selling price or fair market value, whichever is higher.
5. Passive income items like interest, dividends, royalties, prizes and other winnings are also taxed at different rates. For instance, dividends received by citizens and residents from a domestic corporation and the share of an individual partner in a taxable partnership are taxed at 10%. However, the tax on such dividends shall apply only on income earned on or after January 1, 1998. If the dividends are paid to non-residents, the tax is 20% for those engaged in trade or business and 25% for the others.