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I. Introduction to the tax system
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 1!. This law too" effect on #anuar$ 1% 1&.
Taxation is administered through the 'ureau of Internal Revenue which comes
under the (epartment of )inance. The chief executive of the 'ureau of Internal
Revenue is the Commissioner who has exclusive and original *urisdiction 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% modif$ pa$ment of an$ internal revenue tax and abate or
cancel a tax liabilit$. Taxpa$ers can appeal decisions b$ the Commissioner directl$
to the Court of Tax Appeals.
II. Primary tax incentives
A. Tax holiday
The +mnibus Investments Code grants to enterprises that have registered
with the 'oard of Investments and that ,ualif$ under the annual
Investments Priorit$ Plan entitlements to tax holida$s of either four or
six $ears. In addition% the$ are granted tax credits for purchase of
Philippine-made capital e,uipment and raw materials.
. S!ecial Economic "ones
There are over thirt$ special economic .ones throughout the Philippines
where export manufacturing firms are encouraged to start operations.
/nder the Philippine 0xport 1one Authorit$ 2aw% a special economic
.one registered enterprise can% in lieu of all other national and local
taxes% pa$ a tax of 34 of its gross income.
A firm that has registered under the +mnibus Investments Code that is
located and registered to do business within a special economic .one
can have a tax holida$ for the first four or six $ears of its operations%
followed b$ a 34 tax thereafter. The exemption from national taxes
covers all internal revenue taxes% including the 5alue Added Tax.
III. Tax treaty #ith the $nited States
The Philippines has tax treaties with man$ countries% including the /nited
6tates% in order to minimi.e the effects of double taxation. The business
profits of a resident of another countr$ with whom the Philippines has a tax
treat$ are taxable in the Philippines onl$ if the resident has a permanent
establishment in the Philippines to which the profits are attributable.
I%. Primary ty!es o& taxation
A. Individual Income Tax
Residents engaged in trade or business are taxed upon their net income
7gross income less allowable deductions and personal exemptions8
according to a schedule of rates ranging from 94 to 994. The
maximum rate will be reduced to 9:4 on #anuar$ 1% :;;;. Residenc$
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<


3;%;;; pesos

=ead of
3;%;;; pesos


3;%;;; pesos
An additional :3%;;; pesos exemption is given for each of the first four additional
. Passive income
'. Interest
A ?final@ tax of :;4 is imposed on interest income. This tax is
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withheld at the source. 0xceptions to this are<
i. Interest income from a depositar$ ban" with
a )oreign Currenc$ (eposit /nit is sub*ect to a
final tax rate of !.34.
ii. Philippine long term investments of over
five $ears are exempt from tax.
(. )ividends
A final tax of 1;4 is imposed on cash or propert$ dividends from
domestic corporations% *oint stoc" companies% insurance or
mutual funds% or regional operating head,uarters of
multinational corporations.
The distributable net income% after tax% of a partnership is sub*ect
to the same final tax as dividends.
*. +a!ital ,ains
The tax code imposes a final tax of 34 on net capital gains from
the sale of stoc" in a domestic corporation up to 1;;%;;;
pesos. The tax is 1;4 for an$ income over 1;;%;;; pesos. If
the stoc" is stoc" exchange listed% a transfer tax of ;.34 is
also imposed.
-. .rin,e /ene&its
)ringe benefits% such as housing% expense accounts% vehicles%
household personnel% membership fees and educational fees
are taxable under the fringe benefits tax and are pa$able b$ the
emplo$er% who is responsible for withholding it and remitting
it to the government. The fringe benefits tax is 994 7going to
9:4 on #anuar$ 1% :;;;8 of the grossed-up monetar$ value of
the fringe benefits given to the emplo$ee.
+. +or!oration tax
Resident foreign corporations engaged in trade or business in the
Philippines are taxed at the same rates as domestic corporations.
The corporation income tax rate is currentl$ 9;4.
0ffective #anuar$ 1% :;;;% the tax code includes an option for corporations
to be taxed at a rate of 134 of gross income if the President of the
Philippines chooses to enact this option. If the option is granted b$ the
President% onl$ firms whose proportion of the cost of sales or receipts
from all sources does not exceed 334 ma$ exercise the option. This
method of taxation% once elected% shall be irrevocable for three
consecutive $ears.
/nder the Tax Reform Act% the Philippines has also established a >inimum
Corporate Income Tax. 6ubse,uent to the fourth taxable $ear after a
corporation has started its business% a minimum corporate income tax of
:4 of the gross income is imposed if this amount is greater than the
regularl$ computed tax. This amount can be carried forward and
credited against the normal income tax for the three immediatel$
succeeding taxable $ears.
). %alue Added Tax 0%AT1
The 5AT is e,uivalent to 1:4 of the gross selling price or gross value in
mone$ of goods or properties sold% bartered or exchanged. An$ excise
tax on these goods is also part of the gross selling price. In the case of
imported goods% 5AT is based on the total value of the goods as
determined b$ the 'ureau of Customs plus customs duties% excise taxes
and incidental charges. The 5AT is an indirect tax. Ahile the
obligation to collect and remit rests with the seller% the cost of the tax
ma$ be passed on to the bu$er% transferee or lessee of the goods%
properties or services. A 5AT registered entit$ ma$ credit the 5AT 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 ma$ be credited against
succeeding period output 5AT. 5AT registered entities are re,uired to
issue an invoice or receipt for ever$ sale and% in addition to regularl$
re,uired accounting records% the$ must maintain subsidiar$ sales and
purchase *ournals exclusivel$ for 5AT purposes. 5AT reports must be
submitted on a ,uarterl$ basis% twent$-five da$s after the end of the
,uarter. 5AT pa$ments must be made on a monthl$ basis.
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%. 2ther taxes
Percentage tax 7primaril$ for non-5AT registered entities
0xcise tax
(ocumentar$ stamp tax
0state and donor@s 7gift8 tax

Taxes 2ther Taxes

+or!orate Tax!ayers
1. (omestic corporations are taxed at 9;4 of annual taxable income from worldwide sources with
option for 134 tax on gross income sub*ect to certain conditions. (omestic corporations are those
established under the laws of the Philippines and include foreign-owned corporations% otherwise
"nown as subsidiaries.

:. 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. 6uch foreign corporation
engaged in trade or business in the Philippines 7also called resident foreign corporation8 is taxed based
on net income with the same option to pa$ 134 tax on gross income. +n the other hand% a foreign
corporation not engaged in business or trade in the Philippines 7also "nown as a nonresident foreign
corporation8 is taxed based on gross income received.

9. Profits remitted b$ a branch of a foreign corporation to its home office are taxed at the rate of 134.
=owever% this tax does not appl$ to a Philippine branch registered with P01A. (ividends declared b$
a domestic corporation to its foreign parent are generall$ taxed at 9;4. =owever% if the home countr$
of the recipient corporation allows an additional credit of 1!4 as tax deemed paid in the Philippines%
the tax is reduced to 134. (ividends remitted to countries that do not impose a tax on offshore
dividends ,ualif$ for this rate. /nder the Philippine tax treaties with Netherlands% #apan% Berman$%
Corea and Austria% a preferential tax of 1;4 on branch profit remittances is granted. )urthermore%
under the tax treaties with these countries% dividends paid are sub*ect to 1;4 tax if the pa$or-
subsidiar$ is registered with the '+I or if the beneficial owner of the dividends is a compan$ which
holds a certain percentage of the capital of the pa$or subsidiar$. +therwise% the tax on dividends is

D. All corporations% whether domestic or foreign% are sub*ect to capital gains tax on the sale of shares of
stoc"% in the same manner as individual taxpa$ers. +ther income items such as interest and ro$alties
are taxed at various rates. (ividends received b$ a domestic or resident foreign corporation from a
domestic corporation are exempt from tax.
A minimum corporate income tax of :4 of the gross income as of the end of the taxable $ear is
imposed on a corporation which is sub*ect to normal income tax of 9;4 beginning on the fourth
taxable $ear immediatel$ following the $ear in which such corporation was registered with the 'ureau
of Internal Revenue% when the minimum income tax is greater than the normal income tax for the
taxable $ear.

3. An$ 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 immediatel$ succeeding
taxable $ears. 0ver$ corporation formed or availed for the purpose of avoiding the income tax with
respect to its shareholders or the shareholders of an$ other corporation b$ permitting earnings and
profits to accumulate instead of being divided or distributed% is taxed at the rate of 1;4 for each
taxable $ear on the improperl$ accumulated taxable income.

E. In general% an emplo$er 7individual or corporation8 shall pa$ a final tax of 9;4 on the grossed-up
monetar$ value of fringe benefit furnished or granted to the emplo$ee 7except ran" and file8 unless the
fringe benefit is re,uired b$ nature of% or necessar$ to the trade% business or profession of the
Local tax on certain /usinesses
1. >anufacturers% wholesalers% exporters and contractors are sub*ect to graduated taxes on certain
amounts of salesFgross receipts and percentage taxes at maximum rates ranging from .9!34 to .!34
on the amounts not sub*ect to graduated taxes% depending on the place where business is conducted.
)or essential commodities% the rates are 3;4 lower. Retailers are sub*ect to :4 tax if their gross
receipts are PhPD;;%;;; or less and to 14 tax if in excess of PhPD;;%;;;.

:. 'an"s and other financial institutions- percentage tax at maximum rates
ranging from .3;4 to .!34 depending on the localit$ of the business.

9. +thers - var$ing rates
Aside from the above business taxes% there are other taxes
levied in the Philippines such as<

a. Real estate tax

b. 6tamp tax on certain documents% instruments and related
transactions such as issuance of shares of stoc"% evidence
of indebtedness% transfer of real propert$% lease contracts%
insurance policies% etc..

c. Communit$ tax

d. +verseas communications tax

National Taxes

5A2/0 A((0( TAG
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1. Twelve percent 71:48 5AT is imposed on importation of goods and sale% barter% exchange or lease of
goods% properties and services in the Philippines% sub*ect to certain exceptions. Boods or properties
mean all tangible and intangible ob*ects% including real propert$% patents% trademar"s and similar rights
and movable and personal goods. 6ervices cover performance of all "inds of services in the
Philippines for a fee. 0xports are generall$ sub*ect to ;4 5AT. 5AT exempt goods include such items
as boo"s% fertili.ers% livestoc" and poultr$ feeds and agricultural and marine food products in their
original state.

:. Bross receipts tax on certain businesses<.

a. 'an" and other non-ban"
financial intermediaries ;4 to 34
b. 2ife insurance companies 34
c. Common passenger carriers 94
d. 0lectric% gas and water utilities :4
e. +thers ranging from 94 to 9;4

9. 0xcise tax on alcohol% tobacco% petroleum and mineral products% cinematographic films% automobiles%
*ewelr$% etc. at var$ing rates.

Individual Tax!ayers
1. Taxable income from emplo$ment% business% trade and exercise of profession including casual gains%
profits% and of PhP1;%;;; or lessH except items of income sub*ect to final tax and special
treatment% e.g. capital gains and passive income mentioned in items D and 3 below% derived b$ resident
citi.ens from all sources within and without the Philippines are sub*ect to the graduated tax rates of 34
to 9:4. The top rate of 9:4 applies to taxable income in excess of PhP3;;%;;;. Resident aliens and
non-resident citi.ens are sub*ect to the same graduated tax rates but onl$ for income derived from all
sources within the Philippines.

:. Non-resident aliens are taxed at :34 of gross income from sources within the Philippines if their
sta$ within the countr$ does not exceed 1&; da$s in the calendar $ear. +therwise% the$ are taxed on the
basis of graduated rates as in 718 above.

9. Aliens who are emplo$ed b$ regional or area or regional operating head,uarters of multinational
corporations% representative offices% offshore ban"ing units% petroleum service contractors and
subcontractors are sub*ect to income tax at 134 of their gross income from such emplo$ers 7e.g.
salaries% annuities% honoraria and allowances8.

D. Net capital gains reali.ed during each taxable $ear from the sales of shares of domestic stoc"s not
traded in the Philippine 6toc" 0xchange 7P608 are taxed at the rate of 34 on the first PhP1;;%;;;
gains and 1;4 on the excess over PhP1;;%;;;. )or domestic shares listed and traded in the P60% the
tax is 1F: of 14 of the gross selling price or gross value in mone$ of the shares of stoc" sold.
2i"ewise% there is a tax on shares of stoc" sold% exchanged or otherwise disposed through initial public
offering at the rates of 14% :4 and D4% depending on the proportion of the shares sold% exchanged or
otherwise disposed to the total outstanding shares after listing of the shares of closel$ held
corporations. Capital gains on sale of real propert$ are taxed at E4 of gross selling price or fair mar"et
value% whichever is higher.

3. Passive income items li"e interest% dividends% ro$alties% and other winnings are also taxed at
different rates. )or instance% dividends received b$ citi.ens and residents from a domestic corporation
and the share of an individual partner in a taxable partnership are taxed at 1;4. =owever% the tax on
such dividends shall appl$ onl$ on income earned on or after #anuar$ 1% 1&. If the dividends are paid
to non-residents% the tax is :;4 for those engaged in trade or business and :34 for the others.
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