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(1) What are taxes and why do we pay them? – therese

Taxes are funds used by the government to finance basic social services that are vital to the lives of citizens and
economic growth. Every year, individuals and corporations pay government taxes, which are used to fund expenditures.

According to the National Tax Research Center, taxes collected have not been enough to cover total government
expenditures since 1998.

Essential characteristics of tax:

 it is an enforced contribution
 it is generally payable in money
 it is proportionate in character
 it is levied on persons or property
 it is levied by the state which has jurisdiction over the person or property
 it is levied by the law-making body of the state
 it is levied for public purposes

Philippine Tax Law sources?

 1987 Constitution

The Constitution sets limitations on the exercise of the power to tax in the following articles:

Article 6, Sections 27-29

Article 8, Section 5

Article 10, Sections 5-6, 186-187

Article 16, Section 4

 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

 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.

According to Philippine law, nonresidents with income sources in the Philippines are required to file taxes.

For these individuals who reside in a different country but receive income from the Philippines, double taxation could
occur. 
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The Philippines is, however, currently a signatory to tax treaties, that address double taxation situations. These treaties
outline provisions for nonresidents with income sources in the Philippines, and specify certain types of income that may
be subject to tax relief. Under these specific agreements, tax relief can come in the form of tax exemption or lower
preferential tax rates.

Tax exempt sources may include income for:

Teachers
Artists
Athletes
Trainees
Students
Researchers
Director's fees
Government services
Personal services
Pensions
Gains from sales of shares or alienation of property
Independent personal services not rendered for more than 183 days

LOCAL GOV’T TAX LAW

The Philippine Constitution grants local government units the power to create their own sources of revenue and to levy
taxes, fees, and charges. The amount collected may be used to fund local projects and initiatives.

          (1.1)      HISTORY
 It all started from the Ancient Filipinos, where they pay their taxes to their Datu or the Chiefs for the protection they
gave to them, the tax was termed buwis. Everyone is required to pay their taxes, except for the Datu/Chieftain’s
household. Punishment for not paying taxes was also implemented on this period.

The arrival or invasion of the Spanish People from 1521 to 1898 gave the
Filipinos modern concepts of taxation, wherein 16 years old to 60 years
old where forced to pay tributes or tributo to the King of Spain through
the Colonial Government worth 8 reales or 1 peso per year, but there are
also other forms of payment like gold, chickens, textile, rice and forced
labor or Polo Y Servicio. In 1884, the tribute was abolished and was
replaced by the cedula or sedula, a certificate identifying the tax payer
that needs to be carried all the time. If someone is not able to present
their cedula to a guardia civil they will be imprisoned for being
“indocumentado”, which means that they lack valid document or legal
personal identification necessary to prove their identity.

It was followed by the 1987 Philippine Constitution, stating that it “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”, wherein the Philippines covers both national and local.
National Taxes refer to national internal revenue taxes imposed and
collected by the national government through the BIR or Bureau of
Internal Revenue, while the Local Taxes is those imposed and collected by
the local government. Lately the current President of the Philippines, President Rodrigo Duterte, implemented the
TRAIN Law or Tax Reform for Acceleration and Inclusion which was signed last January 01, 2018, which seeks to to
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correct a number of deficiencies in the tax system to make it simpler, fairer, and more efficient. Wherein the rich will
have a bigger contribution and the poor will benefit more from the government’s program and services.

https://www.bir.gov.ph/index.php/transparency/bir-history.html

(2) What are the types of taxes?

According to Philippine tax law, there are two types of taxes:
The Department of Finance (DOF) says that for every P100 contributed through tax, P60 is given to the national
government while P40 is given to local governments.
1. national taxes- imposed by the national gov’t under Nat’l internal revenue code and other laws particularly
the Tariff and customs code
2. Local Taxes – levied by local government units (LGUs) to source funds, which include:
 Basic Real Property Tax
 Franchise Tax
 Business of Printing and Publication Tax
 Sand, Gravel and other Quarry Resources Tax
 Professional Tax
 Amusement Tax
 Community Tax
 Annual Fixed Tax for Delivery Trucks and Vans
 Barangay Tax
 Barangay Clearance

(2.1) four main types of national internal revenue taxes (dear who ever
report this part, especially the A please put an example computation of tax on
compensation income :)

o income, indirect (value-added and percentage taxes), excise and documentary stamp taxes
A. 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.

If engaged in business or the practice of a profession, the net taxable income is calculated in the same manner as that
for corporations. The 40% OSD for individuals is based on gross revenues.

Non-resident foreign nationals not doing business in the Philippines are taxed at a rate of 25% on their Philippine-
sourced income, including wages, rents, gains, interest, dividends and royalties. Foreign nationals who are employed by
offshore banking units, regional or area headquarters and operating headquarters of multinational companies, and
petroleum service contractors and subcontractors enjoy a preferential rate of 15%.
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* Income Tax Description

         Income Tax is a tax on a person's income, emoluments, profits arising from property, practice of profession,
conduct of trade or business or on the pertinent items of gross income specified in the Tax Code of 1997 (Tax Code), as
amended, less the deductions if any, authorized for such types of income, by the Tax Code, as amended, or other special
laws.

Tax Rate Income Tax Rates

I. For Individual Citizens and Resident Aliens Earning Purely Compensation Income and Individuals Engaged in
Business and Practice of Profession
A. Graduated Income Tax Rates under Section 24(A)(2) of the Tax Code of 1997, as amended by Republic
Act No. 10963 

Amount of Net Taxable Income Rate

Over But Not Over  
- P250,000 0%
P250,000 P400,000 20% of the excess over P250,000
P400,000 P800,000 P30,000 + 25% of the excess over P400,000
P800,000 P2,000,000 P130,000 + 30% of the excess over P800,000
P2,000,000 P8,000,000 P490,000 + 32% of the excess over P2,000,000
P8,000,000   P2,410,000 + 35% of the excess over P8,000,000

B. 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.

The 12% VAT paid on the company’s purchases relative to its business subject to VAT is credited against the 12% VAT
due on gross sales or receipts. The net amount is the VAT payable.
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Exports are subject to 0% VAT and entitle the exporter to claim a refund for VAT that has been paid on its purchases of
goods, properties and services relating to the product. Exempt status is granted to certain transactions and entities. In
such cases, VAT paid on the inputs is not allowed to be claimed as creditable input VAT. Instead, the VAT paid forms part
of the deductible costs of the business.

A VAT taxpayer files monthly declarations and quarterly returns that serve as the final adjusted return for the period.
The VAT on services performed in the Philippines by non-resident foreign corporations, as well as the VAT on royalties
and rentals payable to such non-resident foreign corporations, is withheld by the paying local company.

Imports are subject to VAT unless specifically exempted. VAT is paid whether or not the importer conducts business.
Percentage taxes on gross receipts apply to most services and transactions not subject to VAT, such as:

Carriers of passenger on land – 3%;

International carriers on carriage of cargoes – 3%;
Franchisees of gas and water utilities – 2%;
Banks and non-bank financial firms – 1%, 5% or 7%;
Life insurance companies and agents of foreign insurance firms – 5% of the premiums; and
Sale of shares through initial public offerings – one-half of 1% of the selling price.

C. 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 jewelry and precious stones, perfumes, yachts and other sport
vessels.

D. 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. These
include:

Bills of exchange – 0.15%;

Bills of lading – 1%;
Sale of real property – 1.5% of the fair market value;
Original issuance of shares – 0.5% of par value;
Sale of shares (except those listed and traded in the local stock exchange) – 0.38% of par value;
Debt instruments – 0.5%; and
Lease agreements – 0.1% of the total lease over the lease period.

https://www.bir.gov.ph/index.php/tax-code.html

(3) Who pays?

The Tax Reform Act of 1997 says that the following have the duty to pay taxes in the country:
 Citizens: a citizen of the Philippines residing in the country is taxable on all income derived from
sources within and outside the Philippines
 Nonresident citizens: a nonresident citizen is taxed on income derived from sources within the
Philippines
Overseas contract workers: a citizen who is working and deriving income from abroad as an overseas contract
worker is taxed only on income derived from the Philippines
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 Alien individuals: resident and nonresident alien individuals are taxed only on income derived from
sources in the Philippines
 Domestic corporation: a domestic corporation is taxable on all income derived from sources within and
outside the Philippines
 Foreign corporation: whether or not engaged in trade or business in the Philippines, a foreign
corporation is taxable only on income derived from sources within the Philippines

Who are exempt from “income” Tax?

a. Income from abroad of a non-resident citizen who is:

i. A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence
abroad with a definite intention to reside therein

ii. A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant
or for employment on a permanent basis

iii. A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to
be physically present abroad most of the time during the taxable year

iv. A citizen who has been previously considered as a non-resident citizen and who arrives in the Philippines at any time
during the year to reside permanently in the Philippines will likewise be treated as a non-resident citizen during the taxable
year in which he arrives in the Philippines, with respect to his income derived from sources abroad until the date of his
arrival in the Philippines.

b. Overseas Filipino Worker, including overseas seaman

An individual citizen of the Philippines who is working and deriving income from abroad as an overseas Filipino worker is
taxable only on income from sources within the Philippines; provided, that a seaman who is a citizen of the Philippines
and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged
exclusively in international trade will be treated as an overseas Filipino worker.

NOTE: A Filipino employed as Philippine Embassy/Consulate service personnel of the Philippine Embassy/consulate is
not treated as a non-resident citizen; hence, his income is taxable.

c. General Professional Partnership

d. Government Service Insurance System (GSIS)

e. Social Security System (SSS)

f. Philippine Health Insurance Corporation (PHIC)

g. Local Water Districts (LWD)

Tax Reform?
Since the end of the Marcos regime, there have been two major tax reform programs.
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The first was the 1986 Tax Reform Program under the administration of former president Corazon Aquino. The
second program – and the one currently in place today – was the 1997 comprehensive tax reform program under
the administration of former president Fidel Ramos.
A third tax reform program is currently being pushed and seeks to address tax system inequality.
The proposed reforms seek to raise an estimated P600 billion in funds yearly. It also aims to post an annual
growth rate of 7% over the next 6 years. (TRAIN LAW).
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