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Different Kinds of Taxes

Corporate Income Tax

On net taxable income, the normal corporate income tax (RCIT) is 30 per cent. There is a
minimum corporate income tax (MCIT) equal to 2% of taxable income, starting with the fourth
year of company operation. Allowable costs is enumerated for other company operations in
calculating the gross profit according to MCIT. The excess MCIT charged by the RCIT is
accepted as a tax credit against the RCIT accrued over the three years that follow. The 30 percent
rate also refers to multinational companies that are not local. Instead of taxable income the tax is
based on gross income. The deductions apply in compliance with the terms of the tax treaties.

Tax Base

Taxable income is calculated in accordance with the accounting method employed by the
company. Where there are variations between the estimation of revenue and expenditures
between financial and tax statements, the variations are known as reconciling elements in the
income tax return.

Deductible Expenses

When measuring net profit prior to tax, all costs incurred in connection with the running of the
company are eligible to be reported as deductions. The tax code lists the following deductions:
ordinary and necessary expenses; interest; taxes; losses; bad debts; depreciation; depletion of oil
and gas wells and mines; charitable and other contributions; research and development; and
contributions to employee pension trusts.

Requirement for Deductibility

Expenses must be substantiated with official receipts. Expenses may be disallowed as a

deduction if the prescribed withholding tax on payments made for such expenses is not withheld
and paid to the tax authorities.

Optional Standard Deduction

Corporations may claim an optional standard deduction (OSD) at 40% of gross income in lieu of
the itemised deductible expenses. The option to claim the OSD may be changed every year but
the choice, once made in the first quarter, is irrevocable for the taxable year.
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Tax Year

A company can select a calendar or fiscal year for its taxable year, depending on the timetable
represents its taxable income more accurately. Changing the accounting period is required with
prior approval from the BIR.

Group of Companies

For tax purposes, each company is an independent entity and, as such, must file its own tax
return and pay its own taxes. The filing of consolidated tax returns or the relieving of losses
within a group of companies is not allowed. Related companies must interact on an arm’s-length
basis. The BIR is authorised to allocate revenues and expenses between related companies to
prevent tax evasion or to reflect each entity’s income.

Corporate Tax Returns & Payment

Domestic and resident foreign corporations must file their quarterly income tax returns within 60
days of the end of each taxable quarter. They must also file a final adjusted return on or before
the 15th of the fourth month following the end of the tax year – April 15 for taxpayers on
calendar year. The quarterly and annual returns cover the RCIT and the MCIT, as well as income
subject to special tax regimes.

IAET

The improperly accumulated earnings tax (IAET) is essentially a penalty that is levied against
closely held corporations for the unreasonable accumulation of its earnings resulting in the non-
distribution of dividends to shareholders and, consequently, to deferred payment of dividends
tax.

Dividends & Profit Remittances

Dividends from a domestic corporation are tax-exempt in the hands of other domestic
corporations. The tax is 10% if these are paid to citizens and residents, and 25% if paid to non-
resident foreign nationals.

Interest & Royalties

Royalties payable to non-resident foreign corporations are subject to 30% final withholding tax.
A rate of 25% is imposed on non-resident foreign nationals. Interest on foreign loans paid to
non-resident foreign corporations is taxed at 20%. Tax treaties allow preferential rates.
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Other Passive Income

Passive income is earnings derived from a rental property, limited partnership, or other enterprise
in which a person is not actively involved. As with active income, passive income is usually
taxable. However, it is often treated differently by the Internal Revenue Service (IRS).

Other Capital Assets

Gains from the sale or disposition of capital assets other than land or buildings and shares in
domestic corporations are taxed as business income. For individuals, only 50% of the gain is
taxed if the asset is held for over 12 months. Capital losses are deductible only to the extent of
gains made.

Personal Income Tax

Foreign nationals and non-residents are subject to income tax only on income from Philippine
sources. Only residents or citizens are taxed on worldwide income. Graduated rates from 5% to
32% apply to citizens, resident aliens and non-resident aliens staying in the country for more
than 180 days in a year.

Individual Tax Returns & Payment

For individuals, the tax year is the calendar year and income tax is due on or before April 15 of
the following year. The tax liabilities of spouses are calculated separately, although spouses are
required to file their tax returns jointly. Individuals filing income tax returns are required to
disclose in their annual income tax returns the amounts and sources of other income that is
exempt from tax or already subjected to final taxes. For employees receiving only compensation,
employers are relied upon to ensure that the correct tax for the year is fully withheld. Employees
qualifying under the substituted filing scheme are exempt from filing annual income tax returns.

Withholding Taxes

Most income is subject to withholding of taxes. If the payor is classified as a top-20,000

corporation or a top-5000 individual engaged in business, it is required to withhold on all
payments for the purchase of goods (1%) and services (2%). Withholding taxes on income
subject to the RCIT are creditable against the calculated liability. Most passive income is subject
to final withholding taxes. For corporate taxpayers, this is disclosed as income that is no longer
subject to regular income tax. Income payments to non-resident foreign corporations are
withheld at the source as final taxes. Hence, non-resident foreign corporations are not required to
file annual income tax returns.
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Indirect Taxes

A 12% VAT is imposed on the gross selling price on the sale, barter or exchange of goods and
properties, as well as on the gross receipts from the sale of services within the Philippines,
including the lease of properties.

Excise Taxes

In addition to VAT, excise taxes are imposed on the following: alcohol, tobacco, petroleum
products, automobiles, mineral products, and non-essential goods such as jewellery and precious
stones, perfumes, yachts and other sport vessels.

Documentary Stamp Tax

A documentary stamp tax (DST) is required for certain documents, transactions or instruments
specified in the tax code when the obligation or right arises from Philippine sources or when the
property is situated in the Philippines.

Tax Audit

The period allowed for tax authorities to audit companies and assess deficiency taxes is three
years from the date of filing of the final return. If fraud is alleged, this period may extend to 10
years from the date of discovery of the possible fraud. The deficiency tax may be collected
within five years from the date when the assessment becomes final. Assessments may be
contested in courts.

Recovery Of Taxes

In the case of taxes that have been excessively or erroneously paid, a taxpayer may apply for
refund or the issuance of TCCs within two years from the date of payment. For purposes of the
creditable taxes withheld, the option to carry forward the excess credits generated shall be
irrevocable once chosen. A VAT-registered taxpayer may apply for the refund of any excess
VAT when the taxpayer shifts to a non-VAT activity or ceases to be in business or when such
input taxes arise from zero-rated sales.

Bookkeeping Requirements

All business entities subject to internal revenue taxes are required to maintain books of account.
These consist of a journal, a ledger and subsidiary records required for the business. Entities
subject to VAT are also required to keep subsidiary sales and purchase journals.

Financial Reporting

The amended Securities Regulation Code (SRC) Rule 68 (the Rule) issued by the Philippine SEC
prescribed a financial reporting framework or set of accounting principles, standards,
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interpretations and pronouncements, which must be adopted in the preparation and submission of
the annual financial statements of a particular group of entities. The following paragraphs outline
the financial reporting framework prescribed by SRC Rule 68 for each group of entities covered
by the Rule.

Relief from Double Taxation

Relief from double taxation is available for Philippine-sourced income received by non-resident
foreign nationals under the tax treaties that are in effect with the following countries: Australia,
Austria, Bahrain, Bangladesh, Belgium, Brazil, Canada, China, the Czech Republic, Denmark,
Finland, France, Germany, Hungary, India, OBG would like to thank P&A Grant Thornton for
its contribution to THE REPORT The Philippines 2016 Indonesia, Israel, Italy, Japan, Korea,
Kuwait, Malaysia, the Netherlands, New Zealand, Nigeria, Norway, Pakistan, Poland, Romania,
the Russian Federation, Singapore, Spain, Sweden, Switzerland, Thailand, the UAE, the UK, the
US and Vietnam.

Taxes on Imports

Customs duties are generally imposed on articles imported into the Philippines at various rates.
Certain imports may be exempt or conditionally exempt subject to certain situations. There are
also some imports that are specifically prohibited. The basis for the calculation of the duties is
the transaction value, which is subject to adjustments for certain costs. The VAT and excise
taxes for imports are also collected by the Bureau of Customs.

Local Taxes

The local government code provides for the maximum tax rates that local governments in their
jurisdiction that impose on business activities. Land tax is levied at 1-2 per cent, but the range
varies according to usage. The tax base for commercial and manufacturing properties is 50 per
cent of the market value of the land. The foundation is smaller, for farm property at 40 percent
and for residential properties at 20 percent.

Special Tax Regimes

Entities registered in special economic zones are subject to a separate tax regime. They enjoy an
income tax holiday of up to eight years. Thereafter, a preferential gross income tax rate of 5% is
imposed, which is in lieu of national and local taxes, including the RCIT, MCIT and the IAET,
VAT and percentage taxes, excise taxes and DST.

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