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Taxation in the


Philippine College of Health and Sciences

Michael Zarandona
Tax law in the Philippines covers national and local taxes. National taxes refer to national internal
revenue taxes imposed and collected by the national government through the Bureau of Internal
Revenue (BIR) and local taxes refer to those imposed and collected by the local government. The
Tax Code of 1997, Revenue Issuances and BIR Rulings pertaining to national taxes

As per the National Tax Law Cited on I. 1987 Constitution

The 1987 Philippine Constitution sets limitations on the exercise of the power to tax.

The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive
system of taxation. (Article VI, Section 28, paragraph 1)

All money collected on any tax levied for a special purpose shall be treated as a special fund and
paid out for such purpose only. If the purpose for which a special fund was created has been
fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the
Government. (Article VI, Section 29, paragraph 3)

The Congress may, by law, authorize the President to fix within specified limits, and subject to
such limitations and restriction as it may impose, tariff rates, import and export quotas, tonnage
and wharf age dues, and other duties or imposts within the framework of the national
development program of the Government (Article VI, Section 28, paragraph 2) The President shall
have the power to veto any particular item or items in an appropriation, revenue or tariff bill, but
the veto shall not affect the item or items to which he does not object. (Article VI, Section 27,
second paragraph)

The Supreme Court shall have the power to review, revise, reverse, modify or affirm on appeal
or certiorari, as the law or the Rules of Court may provide, final judgments and orders of lower
courts in x x x all cases involving the legality of any tax, impost, assessment, or toll or any penalty
imposed in relation thereto. (Article VIII, Section 5, paragraph)

Tax exemptions are limited to those granted by law. However, no law granting any tax exemption
shall be passed without the concurrence of a majority of all the members of the
Congress. (Article VI, Section 28, par. 4). The Constitution expressly grants tax exemption on
certain entities/institutions such as (1) charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques, and nonprofit cemeteries and all lands, buildings and
improvements actually, directly and exclusively used for religious, charitable or educational
purposes (Article VI, Section 28, paragraph 3); (2) non-stock non-profit educational institutions
used actually, directly and exclusively for educational purposes. (Article XVI, Section 4(3))

In addition to national taxes, the Constitution provides for local government taxation. (Article X,
Section 5) (Article X, Section 6) Parenthetically, the Local Government Code provides that all local
government units are granted general tax powers, as well as other revenue-raising powers like
the imposition of service fees and charges, in addition to those specifically granted to each of the
local government units. But no such taxes, fees and charges shall be imposed without a public

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hearing having been held prior to the enactment of the ordinance. The levy must not be unjust
excessive, oppressive, confiscatory or contrary to a declared national economic policy (Section
186 and 187) Further, there are common limitations to the grant of the power to tax to the local
government, such that taxes like income tax, documentary stamp tax, etc. cannot be imposed by
the local government.

II. Laws

The basic source of Philippine tax law is the National Internal Revenue Law, which codifies all tax
provisions, the latest of which is embodied in Republic Act No. 8424 (“The Tax Reform Act of
1997”). It amended previous national internal revenue codes, which was approved on December
11, 1997. A copy of the Tax Reform Act of 1997, which took effect on January 1, 1998.

Local taxation is treated separately in this Guide. There are, however, special laws that
separately provide special tax treatment in certain situations. (See attached matrix on special

III. Treaties

The Philippines has entered into several tax treaties for the avoidance of double taxation and
prevention of fiscal evasion with respect to income taxes. At present, there are 31 Philippine Tax
Treaties in force. Copies are available at the BIR Library and the International Tax Affairs Division
of the BIR, which is under the Deputy Commissioner for Legal and Inspection Group.

The Philippine Treaty Series, edited and annotated by Haydee Yorac and published by Law
Publishing House, University of the Philippines, is available in seven (7) volumes, covering the
years 1944 to 1978. The Philippine Treaty Index, by Benjamin Domingo, covers the years 1978 to
1982. A copy of the Philippine Treaty Index is available in the Department of Foreign Affairs (DFA)
Library. These publications contain treaties entered into by the Philippines. Tax privileges and
exemptions granted under treaties to which the Philippines is a signatory are recognized under
Philippine tax law. Copies of treaties entered into by the Philippines with other countries and/or
international organizations, from 1983 up to the present, are available at the DFA Library.

IV. Administrative Material

The Secretary of Finance, upon the recommendation of the Commissioner, promulgates needful
rules and regulations for the effective enforcement of the provisions of the Tax Code (Section
244, Tax Code of 1997). The Commissioner of Internal Revenue, however, has the exclusive and
original power to interpret the provisions of the Tax Code, but subject to review by the Secretary
of Finance.

Administrative issuances which may be relied upon in interpreting the provisions of the Tax Code,
which are signed by the Secretary of Finance, or the Commissioner of Internal Revenue, or his
duly authorized representative, come in the form of Revenue Regulations, Revenue

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Memorandum Orders, Revenue Memorandum Rulings, Revenue Memorandum Circulars,
Revenue Memorandum Rulings, and BIR Rulings.

Revenue Regulations (RRs) are issuances signed by the Secretary of Finance, upon
recommendation of the Commissioner of Internal Revenue, which specify, prescribe or define
rules and regulations for the effective enforcement of the provisions of the National Internal
Revenue Code (NIRC) and related statutes.

Revenue Memorandum Orders (RMOs) are issuances that provide directives or instructions;
prescribe guidelines; and outline processes, operations, activities, workflows, methods and
procedures necessary in the implementation of stated policies, goals, objectives, plans and
programs of the Bureau in all areas of operations, except auditing.

Revenue Memorandum Rulings (RMRs) are rulings, opinions and interpretations of the
Commissioner of Internal Revenue with respect to the provisions of the Tax Code and other tax
laws, as applied to a specific set of facts, with or without established precedents, and which the
Commissioner may issue from time to time for the purpose of providing taxpayers guidance on
the tax consequences in specific situations. BIR Rulings, therefore, cannot contravene duly issued
RMRs; otherwise, the Rulings are null and void ab initio.

Revenue Memorandum Circular (RMCs) are issuances that publish pertinent and applicable
portions, as well as amplifications, of laws, rules, regulations and precedents issued by the BIR
and other agencies/offices.

BIR Rulings are the official position of the Bureau to queries raised by taxpayers and other
stakeholders relative to clarification and interpretation of tax laws.

Revenue Regulations, Revenue Memorandum Orders, Revenue Memorandum Rulings, Revenue

Memorandum Circulars, Revenue Memorandum Rulings, and BIR Rulings.

V. Case Law

In the Philippines, Supreme Court decisions form part of the law of the land. As such, decisions
by the Supreme Court in the exercise of its power to review, revise, reverse, modify or affirm on
appeal or certiorari, as the law or the Rules of Court may provide, final judgments and orders of
lower courts cases involving the legality of any tax, impost, assessment, or toll or any penalty
imposed in relation thereto are adhered to and recognized as binding interpretations of
Philippine tax law. Court of Appeals and Court of Tax Appeals decisions which have become final
and executory are also recognized interpretations of Philippine tax law.

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VI. Treatises and other books

There are no Philippine treatises exclusively devoted to Philippine Tax law but various Philippine
authors have come up with annotated versions of the Tax Code. These books can be purchased
from Rex Bookstore and Central Law Publishing, Inc.

VII. Periodicals

Periodicals on Philippine tax law are the:

(1) Philippine Revenue Service (copies available in the BIR Library), published by the BIR from

(2) Philippine Revenue Journal (copies available in the BIR Library) which was both published by
the Bureau of Internal Revenue from 1969 to 2000; and

(3) The Tax Monthly, published by the National Tax Research Center (NTRC) (copies available in
the BIR Library and the NTRC).

VIII. Local Government Tax Law

Local government taxation in the Philippines is based on the constitutional grant of the power to
tax to the local governments.

Local taxes may be imposed, as the Constitution grants, to each local government unit, the power
to create its own sources of revenues and to levy taxes, fees, and charges which shall accrue to
the local governments (Article X, Section 5). With respect to national taxes, local Government
units shall have a just share, as determined by law, in the national taxes which shall be
automatically released to them (Article X, Section 6).

However, certain taxes, such as the following, may not be imposed by local government units:
(Section 133, Local Government Code and Tax Law and Jurisprudence by Vitug & Acosta,
copyright 2000)

(1) Income tax, except when levied on banks and other financial institutions;

(2) Documentary stamp tax;

(3) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as
otherwise provided in the Local Government Code (Code) (except taxes levied on the transfer of
real property ownership under Section 135, and Section 151 of the Code);

(4) Customs duties, registration fees of vessels (except license fees imposed under Section 149,
and Section 151 of the Code), wharf age on wharves, tonnage dues and all other kinds of customs

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fees, charges and dues except wharf age on wharves constructed and maintained by the local
government unit concerned;

(5) Taxes, fees, charges and other impositions upon goods carried into or out of, or passing
through, the territorial jurisdictions of local governments in the guise of charges for wharfage,
tolls for bridges or otherwise, or other taxes in any form whatever upon such goods or

(6) Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or

(7) Taxes on business enterprises certified by the Board of Investments as pioneer or non-
pioneer for a period of six and four years, respectively, from the date of registration;

(8) Excise taxes on articles enumerated under the National Internal Revenue Code and taxes,
fees, or charges on petroleum products, but not a tax on the business of importing,
manufacturing or producing said products (Patron vs. Pililla, 198 SCRA 82);

(9) Percentage tax or value-added tax on sales, barters or exchanges of goods or services or
similar transactions thereon (but not fixed graduated taxes on gross sales or on volume of

(10) Taxes on the gross receipts of transportation contractors and persons engaged in the
transportation of passengers or freight by hire and common carriers by air, land or water except
as provided by the Code;

(11) Taxes on premiums paid for reinsurance or retrocession;

(12) Taxes, fees or charges for the registration of motor vehicles and for the issuance of all kinds
of licenses or permits for the driving thereof, except tricycles;

(13) Taxes, fees, or other charges on Philippine products actually exported except as provided
by the Code (the prohibition applies to any local export tax, fee, or levy on Philippine export
products but not to any local tax, fee, or levy that may be imposed on the business of exporting
said products);

(14) Taxes, fees or charges on duly organized and registered Countryside and Barangay Business
Enterprises (R.A. No. 6810) and on cooperatives (R.A. No. 6938); and

(15) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units (Section 133, LGC)

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IX. National Tax Research Center (NTRC)

Constituted under Presidential Decree 74, the NTRC is mandated to conduct continuing research
in taxation to restructure the tax system and raise the level of tax consciousness among the
Filipinos, to achieve a faster rate of economic growth and to bring about a more equitable
distribution of wealth and income. Specifically, the NTRC performs the following functions:

1. Undertake comprehensive studies on the need for additional revenue for accelerated national
development and the sources from which this might most equitably be derived;

2. Re-examine the existing tax system and tax policy structure;

3. Conduct researches on taxation for the purpose of improving the tax system and tax policy;

4. Pass upon all tax measures and revenue proposal;

5. Recommend of such reforms and revisions as may be necessary to improve revenue collection
and to formulate sound tax policy and a more efficient tax structure.

National Taxes
The taxes imposed by the National government of the Philippines include, but are not limited to:

Income Tax: is a tax imposed on individuals or entities (taxpayers) that varies with respective
income or profits (taxable income). Income tax generally is computed as the product of a tax
rate time’s taxable income. Taxation rates may vary by type or characteristics of the taxpayer.
The tax rate may increase as taxable income increases (referred to as graduated or progressive
rates). The tax imposed on companies is usually known as corporate tax and is levied at a flat
rate. However, individuals are taxed at various rates according to the slab in which they fall.
Further, the partnership firms are also taxed at flat rate. Most jurisdictions exempt locally
organized charitable organizations from tax. Capital gains may be taxed at different rates than
other income. Credits of various sorts may be allowed that reduce tax. Some jurisdictions impose
the higher of an income tax or a tax on an alternative base or measure of income.
Estate Tax: An inheritance or estate tax is a tax paid by a person who inherits money or property
or a levy on the estate (money and property) of a person who has died.
International tax law distinguishes between an estate tax and an inheritance tax—an estate tax
is assessed on the assets of the deceased, while an inheritance tax is assessed on the legacies
received by the estate's beneficiaries. However, this distinction is not always observed; for
example, the UK's "inheritance tax" is a tax on the assets of the deceased, and strictly speaking
is therefore an estate tax.
Donor’s Tax: is the tax on money or property that one living person gives to another. Items
received upon the death of another are considered separately under the inheritance tax.

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Many gifts are not subject to taxation because of exemptions given in tax laws. The gift tax
amount varies by jurisdiction, and international comparison of rates is complex and fluid.
Value-Added Tax: known in some countries as a goods and services tax (GST), is a type
of tax that is assessed incrementally, based on the increase in value of a product or service at
each stage of production or distribution. VAT essentially compensates for the shared services and
infrastructure provided in a certain locality by a state and funded by its taxpayers that were used
in the elaboration of that product or service. Not all localities require VAT to be charged and
goods and services for export may be exempted (duty free).
Percentage Tax: Percentage tax is a business tax imposed on persons, entities, or transactions
specified under Sections 116 to 127 of the National Internal Revenue Code of 1997 (also known
as Tax Code), as amended, and as required under special laws.
Excise Tax: An excise or excise tax is any duty on manufactured goods which is levied at the
moment of manufacture, rather than at sale. Excises are often associated with customs
duties (which are levied on pre-existing goods when they cross a designated border in a specific
direction); customs are levied on goods which come into existence – as taxable items – at
the border, while excise is levied on goods which came into existence inland.
Documentary Stamp Tax: is a tax that is levied on documents. Historically, this included the
majority of legal documents such as cheques, receipts, military commissions, marriage licenses
and land transactions. A physical stamp (a revenue stamp) had to be attached to
or impressed upon the document to denote that stamp duty had been paid before the document
was legally effective. More modern versions of the tax no longer require an actual stamp.

Income Tax for Individuals

Citizens of the Philippines and resident aliens must pay taxes for all income they have derived
from various sources, which include, but are not limited to:

Compensation Income
A: Salary: is a form of payment from an employer to an employee, which may be
specified in an employment contract. It is contrasted with piece wages, where each
job, hour or other unit is paid separately, rather than on a periodic basis. From the
point of view of running a business, salary can also be viewed as the cost of acquiring
and retaining human resources for running operations, and is then termed personnel
expense or salary expense. In accounting, salaries are recorded in payroll accounts.
B: Wage: is monetary compensation (or remuneration, personnel expenses, labor) paid
by an employer to an employee in exchange for work done. Payment may be
calculated as a Fixed amount for each task completed (a task wage or piece rate), or

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at an hourly or daily rate (wage labour), or based on an easily measured quantity of
work done.
Income of self-employed individuals: A sole proprietorship, also known as the sole
trader, individual entrepreneurship or proprietorship, is a type of enterprise that is owned and
run by one person and in which there is no legal distinction between the owner and the business
entity. The owner is in direct control of all elements and is legally accountable for the finances of
such business and this may include debts, loans, loss, etc. A sole trader does not necessarily work
'alone' is it possible for the sole trader to employ other people.
Income of Professionals: a member of a profession or any person who earns their living from a
specified professional activity. The term also describes the standards of education and training
that prepare members of the profession with the particular knowledge and skills necessary to
perform their specific role within that profession. In addition, most professionals are subject to
strict codes of conduct, enshrining rigorous ethical and moral obligations.
Capital Gain Tax: refers to profit that results from a sale of a capital asset, such
as stock, bond or real estate, where the sale price exceeds the purchase price. The gain is the
difference between a higher selling price and a lower purchase price. Conversely, a loss arises if
the proceeds from the sale of a capital asset are less than the purchase price.
Interest: is payment from a borrower or deposit-taking financial institution to a lender or
depositor of an amount above repayment of the principal sum (i.e., the amount borrowed), at a
particular rate. It is distinct from a fee which the borrower may pay the lender or some third
party. It is also distinct from dividend which is paid by a company to its shareholders (owners)
from its profit or reserve, but not at a particular rate decided beforehand, rather on a pro rata
basis as a share in the reward gained by risk taking entrepreneurs when the revenue earned
exceeds the total costs.
Renting: known as hiring or letting, is an agreement where a payment is made for the temporary
use of a good, service or property owned by another. A gross lease is when the tenant pays a flat
rental amount and the landlord pays for all property charges regularly incurred by the ownership.
Royalty: is a payment made by one party, the licensee or franchisee to another that owns a
particular asset, the licensor or franchisor for the right to ongoing use of that asset. Royalties are
typically agreed upon as a percentage of gross or net revenues derived from the use of an asset
or a fixed price per unit sold of an item of such, but there are also other modes and metrics of
Dividend: is a payment made by a corporation to its shareholders, usually as a distribution
of profits. When a corporation earns a profit or surplus, the corporation is able to re-invest the
profit in the business (called retained earnings) and pay a proportion of the profit as a dividend
to shareholders. Distribution to shareholders may be in cash (usually a deposit into a bank

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account) or, if the corporation has a dividend reinvestment plan, the amount can be paid by the
issue of further shares or share repurchase.
Annuity: is a series of payments made at equal intervals. Examples of annuities are regular
deposits to a savings account, monthly home mortgage payments, monthly insurance payments
and pension payments. Annuities can be classified by the frequency of payment dates. The
payments (deposits) may be made weekly, monthly, quarterly, yearly, or at any other regular
interval of time.
Prizes and Winnings: is an award to be given to a person, a group of people like a sports team,
or organization to recognize and reward actions or achievements. Official prizes often
involve monetary rewards as well as the fame that comes with them. Some prizes are also
associated with extravagant awarding ceremonies, such as the Academy Awards.
Pension: is a fund into which a sum of money is added during an employee's employment years,
and from which payments are drawn to support the person's retirement from work in the form
of periodic payments. A pension may be a "defined benefit plan" where a fixed sum is paid
regularly to a person, or a "defined contribution plan" under which a fixed sum is invested and
then becomes available at retirement age. Pensions should not be confused with severance pay;
the former is usually paid in regular installments for life after retirement, while the latter is
typically paid as a fixed amount after involuntary termination of employment prior to retirement.

Partnership: The primary tax form filed by a partnership is the Form 1065. This form notes
the amount of taxable income generated by the partnership, and the amount of this income
attributable to each of the partners. In addition, the partnership issues a Schedule K -1 to
each of the partners, on which is stated the amount of partnership income attributed to
them, and which they should include on their own personal income tax returns.

Because partners must pay income taxes on their shares of partnership income, they
typically require some distribution of cash from the partnership in order to pay their taxes.
If a partner elects to instead leave some portion of his or her share of a distribution in the
partnership, this is considered an incremental increase in the capital contr ibution of that
person to the business.

Compensation and self-employment Income

Individuals, including nonresident aliens, earning compensation income are taxed based only on
the income tax schedule for individuals. On the other hand, self-employed individuals and
professionals are taxed based on the income tax schedule for individuals, applicable percentage
taxes, and value-added tax (VAT). However, if their gross sales (or gross receipts plus other non-
operating income) does not exceed the VAT threshold, they have the option to be taxed either
on the basis of the income tax schedule for individuals and the applicable percentage taxes, or
just with a flat tax rate of 8% on their gross sales (or gross receipts plus other non-operating

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Compensation and self-employment Income
Exempt Transactions
The following goods, services and transactions are exempted from the VAT:

 Agricultural and marine food products in their original state;

 Fertilizers, seeds, seedlings, fingerlings, and feeds and feed ingredients;
 Importation of personal and household effects of persons resettling in the Philippines;
 Importation of professional instruments, wearing apparel, and domestic animals;
 Services subject to percentage tax;
 Agricultural contract growers and millers;
 Health care services;
 Educational services;

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 Agricultural cooperatives, and cooperatives that are non-agricultural and non-electric in

 Residential lots worth at most P1,500,000, or house and lots worth at most P2,500,000
 Monthly lease of residential units at most P15,000;
 Books and mass media publications (e.g. newspaper and magazine);
 Transport services by non-Philippine carriers;
 Cargo vessels and aircraft;
 Financial services;
 Sales to senior citizens and persons with disability;
 From 2019, drugs prescribed for diabetes, high cholesterol and hypertension; and,
 Annual sales of any other goods or services not exceeding P3, 000,000.


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