Antiniolos, Faie R.

BACC3
BSBA 2
INCOME TAXATION

Relevance of taxation in the economy and in attracting investments

Economic activity reflects a balance between what people, businesses, and
governments want to buy and what they want to sell. In the short run, demand factors loom
large. In the long run, though, supply plays the primary role in determining economic potential.
Our productive capacity depends on the size and skills of the workforce; the amount and quality
of machines, buildings, vehicles, computers, and other physical capital that workers use; and
the stock of knowledge and ideas.
TAX INCENTIVES
By influencing incentives, taxes can affect both supply and demand factors. Reducing
marginal tax rates on wages and salaries, for example, can induce people to work more.
Expanding the earned income tax credit can bring more low-skilled workers into the labor force.
Lower marginal tax rates on the returns to assets (such as interest, dividends, and capital gains)
can encourage saving. Reducing marginal tax rates on business income can cause some
companies to invest domestically rather than abroad. Tax breaks for research can encourage
the creation of new ideas that spill over to help the broader economy. And so on.
Note, however, that tax reductions can also have negative supply effects. If a cut
increases workers’ after-tax income, some may choose to work less and take more leisure. This
“income effect” pushes against the “substitution effect,” in which lower tax rates at the margin
increase the financial reward of working.
Tax provisions can also distort how investment capital is deployed. Our current tax
system, for example, favors housing over other types of investment. That differential likely
induces overinvestment in housing and reduces economic output and social welfare.
BUDGET EFFECTS
Tax cuts can also slow long-run economic growth by increasing budget deficits. When
the economy is operating near potential, government borrowing is financed by diverting some
capital that would have gone into private investment or by borrowing from foreign investors.
Government borrowing thus either crowds out private investment, reducing future productive
capacity relative to what it could have been, or reduces how much of the future income from
that investment goes to US residents. Either way, deficits can reduce future well-being.
The long-run effects of tax policies thus depend not only on their incentive effects but
also on their budgetary effects. If Congress reduces marginal tax rates on individual incomes,
for example, the long-run effects could be either positive or negative depending on whether the
resulting impacts on saving and investment outweigh the potential drag from increased deficits.
PUTTING IT TOGETHER
That leaves open questions on how large incentive and deficit effects are, and how to
model them for policy analysis. The Congressional Budget Office and the Joint Committee on
Taxation each use multiple models that differ in assumptions about how forward-looking
people are, how the United States connects to the global economy, how government borrowing
affects private investment, and how businesses and individuals respond to tax changes. Models
used in other government agencies, in think tanks, and in academia vary even more. The one
area of consensus is that the most pro-growth policies are those that improve incentives to
work, save, invest, and innovate without driving up long-run deficits.
The Urban-Brookings Tax Policy Center (TPC) has developed its own economic model to
analyze the long-run economic effects of tax proposals. In TPC’s model, simple reduced-form
equations based on empirical analysis determine the impact of tax policy on labor supply,
saving, and investment. TPC used this model to estimate the long-run economic and revenue
effects of the Tax Cuts and Jobs Act.

Principles of taxation
1. Neutrality:
Prima facie, a tax system should be designed to be neutral, i.e., it should disturb the market forces as
little as possible, unless there is a good reason to the contrary.
As a general rule, people do not like tax payment. In fact, every tax provides an incentive to do
something to avoid it. Since the government is under compulsion to collect taxes, it is not possible to
guarantee complete neutrality. The tax system must, therefore, seek to achieve neutrality, by
minimising the disturbance to the market that comes from taxation.
2. Non-neutrality:
Sometimes it becomes essential to maintain non-neutrality for meeting certain social objectives. These
objectives can be secured by providing tax incentives. This means that in some cases, it may be desirable
to disturb the private market.
For example, the government may impose tax on polluting activities, so as to discourage firms to pollute
the environment. Likewise, a tax on cigarettes will serve a two-fold purpose: raising revenue and dis-
couraging consumption of this harmful item. In both the cases, the market is disturbed but in a desirable
way.
3. Equity:
Taxation involves compulsion. Therefore, it is important for the tax system to be fair. On grounds of
equity it has been suggested that a tax system should be based on a principle of equal sacrifice or ability
to pay. The latter is determined by (a) income or wealth and (b) personal circumstances.
Richard Musgrave has argued that taxes are to be judged on two main criteria: equity (Is the tax fair?)
and efficiency (Does the tax interfere unduly with the workings of the market economy?) It comes to us
a surprise that economists have been mostly concerned with the latter, while public discussions about
tax proposals always focus on the former.
We may, therefore, start with the concept of equitable taxation:
(a) Horizontal Equity:
There are three distinct concepts of tax equity. The first is horizontal equity. Horizontal equity is the
notion that equally situated individuals should be taxed equally. More specifically, persons of equal
income should pay identical amounts in taxes. There is hardly any controversy about this principle. But it
is very difficult to apply the concept in practice.
Let us consider, for example, the personal income tax. Horizontal equity calls for two families in the
same income to pay the same tax. But what if one family has eight children and the other has none? Or,
what if one family has unusually high medical expense, while the other has none (even if two families
have the same number of members)?
(b) Vertical Equity:
The second concept of fair taxation follows logically from the first. If equals are to be treated equally, it
logically follows that un-equals should be treated unequally. This precept is known as vertical equity.
This concept has been translated into the ability to pay principle, according to which those most able to
pay should pay the maximum amount of taxes. Broadly, the principle suggests that the fairest tax is one
based on one’s financial ability to support governmental activities through tax payments.
The ethical base of this principle rests on the assumption that one rupee paid in taxes by a rich person
represents less sacrifice than does the same rupee tax paid by a poor man and that fairness demands
equal sacrifice by both rich and poor in support of government. Thus, a rich man must pay more money
in taxes than would a poor man for each to bear the same burden in supporting services provided by the
government.
Thus, horizontal equity suggests that people who are equal should pay equal taxes: vertical equity
suggest that, un-equals should be treated unequally. Specifically, the rich should pay more taxes than
the poor, since wealth is considered an appropriate measure of one’s ability to pay taxes.

Characteristics of tax
The main characteristic features of a tax are as follows:
(1) A tax is a compulsory payment to be paid by the citizens who are liable to pay it. Hence, refusal to
pay a tax is a punishable offence.
(2) There is no direct quid-pro-quo between the tax payers and the public authority.
(3) A tax is levied to meet public expenditure incurred by the government in the general interest of the
nation.
(4) A tax is payable regularly and periodically as determined by the taxing authority.
(5) A tax is a legal correction.
A good tax system should possess characteristics such as:
1. It should ensure maximum social advantage. Fund of taxation should be used to finance public
service.
2. In a good tax system, the allocation of taxes among tax payers is made according to the ability to pay.
3. It should contain a predominance of good taxes satisfying most of the canons of taxation.

Tax practices in other countries

Taxation is, by and large, the most important source of government revenue in nearly all
countries. According to the most recent estimates from the International Centre for Tax and
Development, total tax revenues account for more than 80% of total government revenue in
about half of the countries in the world – and more than 50% in almost every country.
We begin this entry by providing an overview of historical changes in taxation patterns,
and then move on to an analysis of available data from the last couple of decades, discussing
recent trends and patterns in taxation around the world.
From a historical perspective, the growth of governments and the extent to which they
are able to collect revenues from their citizens, is a striking economic feature of the last two
centuries. The available long-run data shows that in the process of development, states have
increased the levels of taxation, while at the same time changing the patterns of taxation,
mainly by providing an increasing emphasis on broader tax bases.
Taxation patterns around the world today reveal large cross-country differences,
especially between developed and developing countries. In particular, developed countries
today collect a much larger share of their national output in taxes than do developing countries;
and they tend to rely more on income taxation to do so. Developing countries, in contrast, rely
more heavily on trade taxes, as well as taxes on consumption.
Moreover, the data shows that developed countries actually collect much higher tax
revenue than developing countries despite comparable statutory taxation rates, even after
controlling for underlying differences in economic activity. This suggests that cross-country
heterogeneity in fiscal capacity is largely determined by differences in compliance and
efficiency of tax collection mechanisms. Both of these factors seem to be affected by the
strength of political institutions.
In the last part of this entry we provide an overview of empirical evidence regarding the
equity and efficiency implications of taxation. In particular, we show that taxation does have a
powerful redistributive effect, but it is important to consider how taxation also affects behavior
of individuals, by changing economic incentives. For example, recent studies have found that
taxation may lead to efficiency losses by inducing migration of ‘super stars’. These potential
efficiency losses highlight the importance of designing taxation systems that achieve
redistributive objectives at the smallest possible cost.
How much tax revenue do countries collect today?
The visualization shows a map of total tax revenues. These estimates comes from the
International Centre for Tax and Development, and are expressed as a share of GDP.
As we can see from the most recent data, at one extreme of the spectrum we have countries
such as Cuba, France, Denmark, Norway and Sweden, where total tax revenues are higher than
30%. And at the other extreme, we have countries such as Libya and Saudi Arabia, where taxes
account for less than 2% of national income.
More generally, this map shows that there is a clear correlation between GDP and tax
revenues – richer countries tend to collect through taxes a much larger share of their domestic
production. This is a remark that we address in more detail in the following sections.
The visualisation uses the same data, but plots the evolution of tax revenues for
individual countries. You can add countries by clicking on the option ‘ Add country ’; and you
can switch between the ‘map’ and ‘chart’ views by clicking on the tabs at the top of the graph.
The time series show that most high income countries have had relatively stable levels
of tax revenues in the last decade; while trends and patterns are less clear across the
developing world. In many cases, especially among upper-middle income countries, tax
revenues have been going up consistently. The case of Turkey stands out: in 1980 it collected
about 13.5% of GDP in taxes (about half of the US), yet by 2001 it had nearly doubled tax
revenues – almost catching up with the US.
In any case, despite specific cases such as Turkey, differences today remain large and
there is no clear evidence of global convergence. In many developing countries levels are very
low and trends have not been persistently going up by a significant margin.
How do developing and developed countries compare in terms of tax revenue?
The table, from Jha (2008)9, shows differences in tax revenues as a share of GDP for
various country groups. The table pools countries within groups, across two periods of time:
1990-1995 and 1996-2002. For each time-group pool of countries, the author ranks countries
by tax revenue as share of national income, and reports the level for the country in the middle
(i.e. the median tax revenue within that time-group pool). This gives us an idea of the ‘typical’
country in that region, at that point in time.
As we can see, developed countries collect almost twice as much as developing
countries in tax revenue. And developing countries, in turn, collect almost half as much as
transition economies. Also, we can see that developed countries had little change in tax-to-GDP
ratios in the second half of the 20th century, where as in developing countries there seems to
be a broad negative trend.
Singapore Taxation
Singapore follows a territorial basis of taxation. ... Singapore personal tax rates start at
0% and are capped at 22% (above S$320,000) for residents and a flat rate of 15% to 22% for
non-residents. To increase the resilience of taxes as a source of government revenue, Goods
and Services Tax (GST) was introduced in 1994.
American Taxation
The average tax rate for taxpayers who earn over $1,000,000 is 33.1 percent. For those
who make between $10,000 and $20,000 the average total tax rate is 0.4 percent. (The average
tax rate for those in the lowest income tax bracket is 10.6 percent, higher than each group
between $10,000 and $40,000.
Philippine taxation at a glance
The Philippines taxes personal income at a series of progressive rates ranging from 5 per
cent to 35 per cent. Resident citizens are taxed on worldwide income, while resident foreigners
and non-residents are taxed only on Philippine-source income. Foreign individuals may also
benefit from preferential tax treatment.
Corporate Income Tax
The regular corporate income tax (RCIT) is 30% on net taxable income. There is a
minimum corporate income tax (MCIT) equivalent to 2% of gross income, which applies
beginning on the fourth year of commercial operation. Allowable expenses in computing the
gross income subject to MCIT for certain business activities have been enumerated. The excess
MCIT paid over the RCIT is allowed as a tax credit against the RCIT payable in the succeeding
three years. The 30% rate also applies to non-resident foreign corporations. The tax is
calculated on gross income instead of net income. Exemptions apply pursuant to tax treaty
provisions.
Certain types of income and corporations are subject to special tax rates and are as follows:
International carriers doing business in the Philippines – 2.5% of gross billings from
carriage originating from the Philippines. Lower rates are available under tax treaties.
Exemption applies on condition of reciprocity;
 Expanded foreign currency deposit units of banks – 10% on onshore interest income;
 Offshore banking – 10% on onshore interest income;
 Regional operating headquarters of multinational companies – 10% of taxable income;
 Regional or area headquarters of multinational companies – exempt.
 These entities are not allowed to generate income from Philippine sources nor solicit or
market goods and services on behalf of their head office or affiliates. They are
authorised to act as supervisory, communications and coordinating centres for their
affiliates;
Contractors and subcontractors engaged in petroleum exploration – 8% of gross income
in lieu of all other taxes;
Non-resident foreign owners, lessors or distributors of motion pictures – 25% of gross
income;
Non-resident owners of vessels – 4.5% of gross rental, lease or charter fees from
citizens; and
Non-resident foreign lessors of aircraft, machinery and other equipment – 7.5% on
rentals, charter fees and other fees from Philippine sources.
These taxes are withheld by the payer.
Tax Base
Taxable income is calculated in accordance with the accounting method employed by
the company. Where there are differences in financial and tax reporting on the recognition of
income and expenses, the differences are recognised as reconciling items on the income tax
return.
Deductible Expenses
All expenses incurred in connection with the conduct of business are allowed to be claimed as
deductions when calculating net income subject to tax. 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.
Deductibility of certain expenses is subject to limitations. The interest expense allowed
shall be reduced by an amount equivalent to 33% of the company’s interest income that is
subject to final tax. Interest paid by corporations to a majority individual shareholder is non-
deductible.
Likewise, interest expenses are not allowed as a tax expense if paid to a personal
holding company that is more than 50% owned by a majority shareholder of the corporation.
Entertainment and recreation expenses of a business are subject to a limit of 0.5% and
1% of net revenue for taxpayers engaged in selling goods and services, respectively.
Income tax in a foreign country by a domestic corporation on foreign-sourced income
may be claimed as a deductible expense or as a tax credit against Philippine income tax due on
such income.
Property losses sustained in relation to the business and not indemnified by insurance
or other means are deductible from gross income. The net operating loss incurred in any
taxable year can be carried forward to the three succeeding taxable years. Capital losses can be
offset only against capital gains. Losses from wash sales of stock or securities are not
deductible.
Research and development expenses may be claimed as a deduction during the year
they are incurred. The taxpayer has an option to amortise the expense over a period of not less
than 60 months, beginning with the month when the benefits from such expenditure were
realised.
Contributions to a qualified employee pension trust are deductible to the extent of the
excess of the contribution needed to cover the pension liability accruing during the taxable
year.
The amount shall be apportioned equally over a period of 10 years. The plan should be pre-
qualified by the tax authorities.
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.
Tax Year
A corporation may choose a calendar or fiscal year for its taxable year, depending on
which schedule more accurately reflects its taxable income. Prior approval from the BIR is
required to change the accounting period.
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.
In 2013 the Philippines issued the transfer pricing regulations, which specify the
methodologies to be used in determining the arm’s-length price and the documentation
required to show compliance with the arm’s-length standard in related party transactions. The
documentation shall be submitted to the tax authorities upon notification.
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.
Non-resident foreign corporations are not required to file income tax returns. Taxes due
on their Philippine-sourced income are withheld at the source by the Philippine-based company
making the payment.
Excess income taxes paid during the year may be applied for refund or the amount may
be carried over to the succeeding quarter. The latter option shall be irrevocable for that taxable
year and no application for cash refund shall be allowed.
 Tax credit certificates (TCCs) may only be used to pay for certain direct internal revenue
tax liabilities of the holder, and are prohibited from being transferred to any person.
In 2012 the Philippine government implemented a monetisation programme running
from 2012 to 2016 that allows all value-added tax (VAT) TCCs to be converted to cash.

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.
The IAET is imposed at 10% of the accumulated retained earnings in excess of 100% of
the paid up capital of the corporation, and an allowance for reasonable needs, on a case to case
basis. Paid up capital refers to the par value, excluding any premium paid.
Banks, insurance companies, publicly held corporations and companies registered with –
and enjoying preferential tax treatment in – special economic and freeport zones are not
covered by the IAET. The IAET is due one year and 15 days following the close of the taxable
year and is covered by a separate tax return.
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.
Dividends paid to non-resident foreign corporations from domestic corporations are
taxed at 30% or the treaty rate. A lower rate of 15% applies if the recipient’s home country
does not impose a tax on foreign-sourced dividends or when there are tax-sparing provisions.
Dividends received by domestic corporations from foreign corporations form part of the income
subject to RCIT.
A 15% tax rate also applies on the remittance of profits of Philippine branches to their
foreign parent companies. The tax is based on total profits that are applied to remittance
without any deduction for the tax component. The tax is not waived even if the profits for
remittance are reinvested in the Philippines. Branches registered in the special economic zones
are exempt from this tax. Preferential rates of branch profits remittance tax are available under
treaties.
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.
Other Passive Income
Scheduled rates apply on most passive income, including the following:
Interest from bank deposits and yields from deposit substitutes and similar
arrangements, royalties, prizes and other winnings from Philippine sources – 20%;
Interest from foreign currency deposits in a local bank – 7.5% (non-residents are
exempt);
Interest income from long-term deposits – individuals are exempt;
Gains from sale of shares listed and traded through the local exchange – exempt from
income tax but subject to a transaction tax at 0.5% of selling price;
Capital gains from the sale of land and buildings classified as capital assets – 6% of the
gross selling price or market value, whichever is higher (not applicable to non-resident foreign
individuals and corporations); and
Capital gains from the sale of shares in a domestic corporation, not traded through the
local stock exchange – 5% on the first P100,000 ($2220) of net gain and 10% on the excess.
This tax is imposed on the cumulative net gain from the sale of shares during the taxable
year. Gains from the surrender of shares upon dissolution of the issuing company are taxed at
the regular corporate/individual tax rates.
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. 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%.
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.
Employees receiving only the statutory minimum wage are exempt from the payment of
income tax if they do not earn other taxable income, whether from the conduct of business or
from other employment. Employers are not required to withhold tax from them. Non-resident
aliens not engaged in business are not required to file an annual income tax return.
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.
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.
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.

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. 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.
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.
Accounting records may be kept in either English or Spanish. The books and records must be
preserved for a period of at least 10 years. Companies with gross quarterly sales or receipts
exceeding P150,000 ($3330) shall have their books audited and examined yearly by
independent certified public accountants who should be accredited as tax agents by the tax
bureau.
For public companies, banks and insurance companies, the independent certified public
accountants should further be accredited by regulatory agencies, such as the Securities and
Exchange Commission (SEC), the Bangko Sentral ng Pilipinas (the central bank) or the Insurance
Commission.
Financial statements are required to be filed together with annual income tax returns. In
addition to maintaining books of accounts, the Corporation Code requires businesses to keep
records of all business transactions, minutes of meetings of shareholders and directors, and a
stock and transfer book. Sales should be evidenced by receipts and invoices based on the
prescribed format.
The books may be in manual or digital form. These are required to be registered with
the tax authorities prior to their use. Large taxpayers, however, are mandated to adopt a
digitised accounting system.
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, 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.
Large and/or publicly accountable entities are those with total assets exceeding P350m
($7.8m) or total liabilities of more than P250m ($5.6m). Other entities covered by the Rule
include those required to file financial statements under Part II of SRC Rule 68 (for example, an
issuer that has sold a class of securities pursuant to registration under Section 12 of the SRC, an
issuer with a class of securities listed for trading on an exchange, and an issuer with assets of at
least P50m [$1.1m] and 200 or more shareholders each holding at least 100 shares of a class of
equity securities); entities in the process of issuing securities to the public market; or entities
that are holders of secondary licences issued by regulatory agencies.
Entities qualifying in any of the criteria provided above shall use Philippine Financial
Reporting Standards (PFRS) as their financial reporting framework. However, another set of
reporting rules may be permitted by the SEC for certain regulated entities, such as banks and
insurance companies.
The PFRS are adopted by the Financial Reporting Standards Council (FRSC) from the
International Financial Reporting Standards (IFRS) issued by the International Accounting
Standards Board (IASB).
Small and medium-sized entities (SMEs) are defined as entities with total assets of
between P3m ($66,600) and P350m ($7.8m), or total liabilities between P3m ($66,600) and
P250m ($5.6m). If the entity is a parent company, such amounts will be based on consolidated
figures. Other entities classed as SMEs are those not required to file financial statements under
Part II of SRC Rule 68; entities not in the process of issuing securities to the public market; and
entities that do not hold secondary licences. Entities that qualify based on all above criteria
shall use the PFRS for SMEs as their financial reporting framework. PFRS for SMEs are adopted
by the FRSC from the IFRS for SMEs issued by the IASB. Except for those allowed under the
Rule, the SEC requires adoption of PFRS for SMEs for entities that qualify as SMEs.
At the smallest end of the scale, micro entities are considered to be those with total
assets and liabilities below P3m ($66,600); entities not required to file financial statements
under Part II of SRC Rule 68; entities not in the process of offering securities to the public; and
entities that do not hold any secondary licences.
Micro entities may choose to use either the income tax basis or PFRS for SMEs, provided
that the financial statements shall at least consist of the statement of management’s
responsibility, auditor’s report, statement of financial position, statement of income and notes
to financial statements, all of which cover the two-year comparative periods, if applicable.
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. The new treaty with Turkey takes effect on income derived in
2016.
To avail themselves of the relief from double taxation pursuant to tax treaties, foreign
nationals must file a tax treaty relief application with the BIR.
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
may impose on business activities in their jurisdiction. Property tax is imposed at 1-2%, but the
base differs depending on use. For commercial and industrial properties, the tax base is 50% of
the property’s market value. The base is lower, at 40%, for agricultural properties, and 20% for
residential properties.
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.
Sources of Philippine tax laws
National Tax Law
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 wharfage 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 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, can be found here.
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
laws)
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 Memorandum Orders, Revenue Memorandum Rulings, Revenue Memorandum
Circulars, Revenue Memorandum Rulings, and BIR Rulings.
Regulations (RRs) are issuances signed by the Secretary of Finance, upon
recommendation of the Commissioner of Internal Revenue, that 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 are found
here.
V. Case Law
In the Philippines, Supreme Court decisions form part of the law of the land. As such, decisions
by the Supreme Court (sc.judiciary.gov.ph) 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.
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
1969-1980;
(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), wharfage on wharves, tonnage dues and all other kinds of
customs fees, charges and dues except wharfage 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
merchandise;
(6) Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers
or fishermen;
(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
production);
(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)
The Local Government Code (www.comelec.gov.ph) or (www.dilg.gov.ph/) contains provisions
on the scope and limitation on the exercise of local government taxing power.
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.
Sources of tax information
The Internal Revenue Code is the actual body of law that contains the rules that make
up the federal income tax, payroll taxes, estate and gift taxes, and so on. The language it uses is
not exactly intended for a general audience, but when you want an authoritative source on a
federal tax topic, the IRC is the first place to look. My favorite place to reference the Internal
Revenue Code is Cornell University Law School’s website.
Treasury regulations are the Treasury Department’s interpretation of the Internal
Revenue Code. They are necessary because the IRC often provides a rather bare-bones
framework that leaves many questions unanswered with regard to how the law should actually
be applied. There are multiple types of Treasury regulations, and the distinctions are important.
Final regulations are binding on the IRS — meaning you can rely on them.
Temporary regulations are also binding until superseded by another regulation.
Proposed regulations are not binding, but they can still be useful for getting an idea of
the IRS’s viewpoint on a given topic.
Treasury regulations are available via the GPO website.
Revenue rulings are an official form of guidance issued by the IRS explaining how the law would
be applied to a specific set of facts. You can find revenue rulings from the last several years on
the IRS website.
Private letter rulings are akin to revenue rulings in that they show how the IRS would
apply the law to a specific set of facts. But there’s one big difference: Private letter rulings are
only binding on the IRS with respect to the taxpayer who requested the ruling, so other
taxpayers cannot rely on them as legal precedent. That said, like proposed regulations, private
letter rulings can still be useful for getting an idea of the IRS’s view on a particular matter. Past
private letter rulings are also available on the IRS website.
 Finally, federal courts’ rulings about tax matters (e.g, opinions issued by the U.S. Tax
Court) are a source of legal precedent. Personally, however, I’ve found that the majority of
everyday tax questions can be answered without having to look outside of the Internal Revenue
Code and the types of IRS-issued guidance discussed above.