The Philippines imposes corporate and personal income tax on its resident citizens and domestic corporations, i.e., corporations incorporated under Philippine law (including subsidiaries of foreign corporations) in respect of income earned anywhere in the world. Foreign corporations (i.e., incorporated under foreign laws, whether or not registered to do business in the Philippines), non-residents Philippine citizens, and foreign citizens are subject to Philippine income tax only on their Philippine sourced income.
The National Internal Revenue Code (NIRC) generally imposes a 25% income tax on gross income of non-resident foreign corporations from Philippine sources. Dividends from a domestic corporation to a non-resident foreign corporation are also subject to the 25% income tax rate; however, the rate may be reduced to 15% subject to the condition that the country in which the nonresident foreign corporation is domiciled shall allow a credit against the tax due from the nonresident foreign corporation on taxes deemed to have been paid in the Philippines equivalent to 10%, which represents the difference between the regular income tax and the 15% preferential tax on dividends. Interest on foreign loans extended by a non-resident foreign corporation are subject to income tax of 20%.
The Philippines has several double-tax treaties that may reduce or eliminate income tax. For example, the Philippines-United States Tax Convention (1983) reduces the withholding tax on most cross-border interest payments to a maximum of 15% of the gross amount of such interest.
In addition to income tax, value added tax (VAT) is imposed by the national government at the general rate of 12% of gross sales of goods or properties, gross receipts on sale of services, and imports. Certain sales and imports, however, are subject to either zero-percent VAT or are VAT exempt. The gross receipts from the sale of services of non-residents are also subject to a 12% VAT, the rule on regularity notwithstanding.
The Philippine payer of any such amounts is obliged to withhold and remit the income tax and VAT on behalf of the non-resident recipient.
Local governments, i.e., provinces, cities, and municipalities, impose local business taxes and fees on corporations and individuals residing or carrying on business within their jurisdiction. The Local Government Code (LGC) provides the maximum taxes that may be imposed by the local government units (LGUs) and each of the LGUs are empowered to create their own local tax ordinance.
In this chapter
- Legal systems
- Taxation authorities
- Business vehicles
- Financing a corporate subsidiary
- Corporate income tax
- Cross-border payments
- Payroll taxes
- Indirect taxes
- Local government taxes
Legal systems
The Philippine legal system operates as a hybrid of civil law, which can be traced back to the Spanish legal system, and common law, with features from the Anglo-American heritage. The Philippines has a codifed Constitution which declares the state’s principles and policies and ensures the fundamental rights of all citizens, and to which all other laws must conform to. The power to enact laws is vested upon Congress, one of the co-equal branches of the government. On the other hand, the Philippines’ common law roots are evident from case law or jurisprudence, which supplements or amplifies the existing statutes. Thus, the courts rely upon precedents in interpreting and applying the bulk of the written laws and in rendering its decision in cases not covered by the letter of the written laws.
Local government units (LGUs) are also provided with local legislative powers within their own jurisdictions. Thus, in addition to national laws, LGUs, through their local legislative councils, may also enact ordinances and issue resolutions.
Taxation authorities
Philippine taxation is administered both at national and local levels. On the national level, the Bureau of Internal Revenue (BIR) is the primary taxing authority and is responsible for the administration of the imposition, assessment, and collection of national internal revenue taxes including income taxes, VAT, excise taxes, and other taxes imposed under the NIRC. The Commissioner of Internal Revenue (CIR) has the power to interpret the provisions of the NIRC and other tax laws, subject to review by the Secretary of Finance. It also has the power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the NIRC or other laws or portions thereof administered by the BIR, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.
On a local level, the LGUs such as provinces, cities, municipalities, and barangays (the smallest political unit in the country) are imbued with authority to impose and collect local taxes. These include real property taxes, professional taxes, and business taxes. The imposition of such taxes are under the discretion of the LGU, subject to limits under national laws. Each LGU also has its own local revenue office to administer and collect such taxes.
Business vehicles
A foreign entity may establish a Philippine business vehicle through various forms such as corporations (stock or non-stock), partnerships or joint ventures, branch, representative offices, regional headquarters, and regional operating headquarters.
Corporations
A corporation in the Philippines is considered a juridical person and has a personality distinct from that of its stockholders and members. Thus, stockholders or members are generally not personally liable for the acts of the corporation and vice versa. Such corporate juridical personality commences from the issuance of a Certificate of Incorporation by the Securities and Exchange Commission (SEC) and may exist in perpetuity unless the incorporators provide for a limited corporate term. The application for incorporation is commenced by the filing of the corporation’s articles of incorporation (AOI) and by-laws with the SEC.
Corporations in the Philippines are regulated and governed by the Revised Corporation Code (RCC). Any person, partnership, association, or corporation, singly or jointly with others but not more than fifteen (15) in number, may organize a corporation for any lawful purpose or purposes, provided that each incorporator of a stock corporation must own or be a subscriber to at least one (1) share of the capital stock.
While there is generally no required minimum capital stock upon incorporation, corporations with more than 40% foreign-owned equity catering to the domestic market are required a minimum paid-in capital of US$200,000. This capitalization requirement may be reduced to US$100,000 if (i) the activity involves advanced technology as determined and certified by the Department of Science and Technology; or (ii) if it employs at least 50 direct employees as certified by the appropriate regional office of the Department of Labor and Employment. Corporations engaged in certain types of activities may require a higher paid-in capital and/or a higher Filipino ownership percentage.
Except for one-person corporations (OPCs), which may have only one director, corporations should have a minimum of 2 and a maximum of 15 directors. Only an individual who owns at least one share of stock of the corporation is qualified to be elected as director. Foreign nationals can be elected as directors in proportion to their equity participation. Corporations vested with public interest are required to have independent directors constituting at least 20% of the board.
The mandatory corporate officers of a corporation are: (i) the president, who must also be a director; (ii) treasurer, who must be a resident of the Philippines; and (iii) secretary, who must be a resident and citizen of the Philippines. The president may not concurrently sit as secretary or treasurer of the corporation. A corporation organized under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines is considered a Philippine national; and all officers of such corporation must be Philippine citizens.
Partnerships and Joint Ventures
Similar to a corporation, a partnership is treated as having a legal personality separate and distinct from its partners. However, the partners may be made liable for the debts and obligations of the partnership. Parties may opt to form limited partnerships where limited partners can only be held liable to the extent of their contributions; however, this still requires at least one general partner who shall be personally liable to creditors.
From a tax perspective, a partnership, no matter how created or organized, is generally treated as a corporation for Philippine income tax purposes, except for general professional partnerships and a joint venture (JV) or consortium formed for the purpose of undertaking construction projects, or engaging in petroleum, coal, geothermal, and other energy operations pursuant to an operating or consortium agreement under a service contract with the government. For partnerships or JVs that are not treated as corporations, it is the partners, rather than the partnership or JV itself, that are subject to income tax.
Foreign Corporations (with or without a Philippine branch)
Generally, a foreign corporation doing business in the Philippines is required to apply for a license with the SEC before it may be allowed to conduct such business. The phrase "doing business" includes
- Soliciting orders, service contracts, opening offices, whether called "liaison" offices or branches;
- Appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling 180 days or more;
- Participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and
- Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization.
However, the phrase "doing business” does not include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account.
Operating without said license would mean that such foreign corporation cannot sue or maintain lawsuits to enforce its rights in Philippine courts, but may nevertheless be sued on any valid cause of action under Philippine law. Further, the SEC may issue a cease-and-desist order for such non-registered foreign corporation operating within the Philippines.
A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the country. Where the non-resident foreign corporation, however, is a resident in a country with which the Philippines has a double-tax treaty, it may be eligible to claim the preferential tax rates or exemption from Philippine income taxes.
A foreign corporation may opt to register a regular branch office, a representative office, regional operating headquarters (ROHQ), or regional headquarters (RHQ), based on its planned activities in the Philippines.
- A branch office of a foreign corporation may conduct its registered business activities and derive income from the Philippines.
- A representative or liaison office deals directly with the clients of the parent company but does not derive income from the Philippines, and is fully subsidized by its head office. It undertakes activities such as, but not limited to, information dissemination and promotion of the company’s products as well as quality control of products.
- A regional operating headquarters is a branch established in the Philippines by a multinational company, engaged in any of the following services:
- General administration and planning;
- Business planning and coordination;
- Sourcing and procurement of raw materials and components;
- Corporate finance advisory services;
- Marketing control and sales promotion;
- Training and personnel management;
- Logistic services;
- Research and development services and product development;
- Technical support and maintenance;
- Data processing and communications; and
- Business development.
To register a branch office, the foreign corporation must meet the financial ratio set by the SEC, e.g., a regular branch office must have a solvency and liquidity ratio of 1:1, and debt to equity ratio of 3:1.
Financing a corporate subsidiary
Equity financing
Contributions for shares
Where an equity investment is made into a Philippine corporation in exchange for shares, the amount of the investment is added to the corporation’s capital account, either as paid-in capital or additional paid-in capital (APIC). For shares of stock with par value, issuance is subject to documentary stamp tax (DST) of PhP2.00 for every PhP200.00, or a fraction thereof, of the par value of the shares of stock. Issuance of no-par shares are subject to DST at the same rate, based on the issue price.
Contributions without taking additional shares
An equity contribution may be made by a shareholder to a corporation without the issuance of additional shares, and the amount is added to the APIC account of the corporation. However, the APIC shall neither be declared as dividend nor shall be reclassified to absorb deficiency except through an organization restructuring duly approved by the SEC.
Redemption or repurchase of shares
Pursuant to the trust fund doctrine, where the corporation’s assets are held as a trust fund to answer for the obligations of the corporation, the corporation’s capital may generally not be returned to the shareholders, except: (i) in the process of liquidation of the corporation, with prior approval of the SEC; (ii) on the redemption of redeemable shares, regardless of whether or not the corporation has retained earnings; or (iii) as consideration for the repurchase of the shares for a legitimate business purpose and provided the corporation has unrestricted retained earnings. In the later case, the repurchased shares become treasury shares. In all cases, the redemption or repurchase of shares cannot be to the prejudice of the corporation’s creditors.
Any capital gain derived from liquidating dividends, i.e., the surrender and retirement of shares in liquidation or redemption, is subject to income tax at the regular rate. In contrast, the repurchase of shares of stock not listed and traded in the stock exchange, which become treasury shares, will subject the selling stockholder to 15% capital gains tax on the net capital gain.
Debt financing
Interest income
Interest income from Philippine sources derived by non-resident foreign corporations from foreign loans extended to Philippine borrowers is subject to a 20% withholding tax. The withholding tax rate can be reduced under an applicable double-tax treaty. For example, the Philippines-Singapore tax convention for the avoidance of double taxation (1977) imposes an income tax not to exceed 15% on interest income derived in the Philippines by a resident of Singapore.
Interest income from the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements received by domestic corporations from sources within the Philippines are subject to income tax at the rate of 20%. However, interest income derived by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a income tax at the rate of 15% of such interest income.
Gross income deduction of payors of interest
Interest on debt obligations paid or incurred within a taxable year by taxpayers, other than non-resident foreign corporations and non-resident aliens not engaged in trade or business in the Philippines, in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income - provided, however, that the taxpayer's otherwise allowable deduction for interest expense shall be reduced by 20% of the interest income subjected to final tax.
However, no deduction shall be allowed in respect of interest if:
- Within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise. Such interest shall be allowed as a deduction in the year the indebtedness is paid and if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year;
- Both the taxpayer and the person to whom the payment has been made or is to be made are related parties as defined under the NIRC; or
- The indebtedness is incurred to finance petroleum exploration.
At the option of the taxpayer, interest incurred to acquire property used in trade or business or the exercise of a profession may be allowed as a deduction or treated as a capital expenditure.
Non-resident foreign corporations and non-resident aliens not engaged in trade or business in the Philippines are not entitled to interest expense deduction.
Withholding tax implications
Gross income derived from all sources within the Philippines by non-resident foreign corporations and non-resident aliens not engaged in trade or business in the Philippines, such as interests, dividends, rents, royalties, and service fees are subject to final withholding tax.
Final withholding tax withheld by the withholding agent constitutes full and final payment of the tax due from the payee of the said income. The liability for payment of tax rests primarily on the payor as a withholding agent. Tthe withholding agent must withhold the income tax and, where applicable, the VAT. Failure to withhold the required amount of tax, can subject the payer/withholding agent to liability for the deficiency. The payee is not required to file a tax return for the particular income.
Thin capitalization
The Philippines does not have laws or regulation defining thin capitalization or otherwise imposing limits on the amount of interest from debt financing which a creditor may impose.
Interest payments between related parties as defined in the NIRC, however, are not deductible. When the debt financing agreement is between related parties not covered by the prohibition on deduction of interest, transfer pricing rules will apply and the BIR may adjust the amount of interest to be deducted, if the debt financing agreement is not found to be at an arm’s length, or not under comparable conditions and circ*mstances as a transaction with an independent party.
Stamp tax
Documents, loan agreements, instruments, and papers related to the financing are subject to a documentary stamp tax (DST) under the NIRC, which must be paid within 5 days after the close of the month when the taxable document was made, signed, issued, accepted, or transferred. This includes inter-company advances, e.g., advances from/to stockholders.
As to equity financing, the stamp tax applies to the:
- Original issue of shares of stock with par value: PhP2.00 on each PhP200.00, or fraction thereof, of the par value.
- Original issue of shares of stock without par value: PhP2.00 on each PhP200.00, or fraction thereof, of the actual consideration for the issuance the shares of stock.
- Issuance of stock dividends: PhP2.00 on each PhP200.00, or fraction thereof, of the actual value represented by each share.
- Sales, agreements to sell, memoranda of sales, deliveries or transfer of shares or certificates of stock with par value: PhP1.50 on each PhP200.00, or fraction thereof, of the par value.
- Sales, agreements to sell, memoranda of sales, deliveries or transfer of shares or certificates of stock without par value: 50% of the documentary stamp tax paid upon original issuance.
As to debt financing:
- Original issue of debt instruments (including, but not limited to, debentures, certificates of indebtedness, due bills, bonds, loan agreements, orders for payment of any sum of money, and promissory notes): PhP1.50 on each PhP200.00 or fraction thereof, of the issue price of the debt instrument.
Bonds, debentures, certificates of stock, or certificates of indebtedness issued in any foreign country sold or transferred in the Philippines are subject to the same documentary stamp tax issued, sold, or transferred in the Philippines. The stamp tax on loan agreements also covers those signed abroad where the object of the contract is located or used in the Philippines.
Corporate income tax
Income tax rate
Domestic corporations, or those organized in or existing under the laws of the Philippines, are generally subject to a corporate income tax rate of 25% of taxable income. Domestic corporations with a taxable income not exceeding PhP5,000,000.00 and with total assets not exceeding PhP100,000,000.00 are subject to a lower corporate income tax rate of 20%. Taxable income is gross income from all sources within and without the Philippines less deductions allowed under the law.
For resident foreign corporations, or those which are organized, authorized, or existing under the laws of any foreign country and engaged in trade or business within the Philippines, the corporate income tax rate is generally 25% of taxable income from all sources within the Philippines.
Beginning the fourth taxable year after commencement of business operations, however, domestic corporations and resident foreign corporations are subject to a minimum corporate income tax (MCIT) of 2% of gross income. The corporation must pay the higher between MCIT and the tax computed based on the regular corporate income tax rates.
Nonresident foreign corporations, or those which are organized under the laws of a foreign country and not doing business with the Philippines, are generally subject to a tax equivalent to 25% of gross income (not taxable income) received from all sources within the Philippines.
Note that the NIRC prescribes specific rates for certain types of income, and depending on the type of corporation receiving the same.
Capital gains
Capital gains are gains derived by a taxpayer from the sale or disposition of capital assets, which are defined as:
- Property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation in the NIRC; or
- Real property used in trade or business of the taxpayer.
The NIRC imposes on domestic corporations a tax on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of the corporation and are treated as capital assets. Such capital gains tax is equivalent to 6% of the gross selling price or the fair market value of the asset, whichever is higher.
A final tax of 15% is imposed as capital gains tax on the net capital gains realized from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the local stock exchange.
Other types of capital gains are subject to the regular income tax rate applicable to the corporation.
Branch profit remittance tax
Any profits to be remitted by a branch of a resident foreign corporation to its head office are subject to a branch profit remittance tax equivalent to 15% of the actual amount without any deduction for the tax component thereof, except for activities registered with the Philippine Economic Zone Authority (PEZA). Gains, profits, income, and capital gains received by a resident foreign corporation from sources within the Philippines are only considered branch profits if they are effectively connected with the conduct of the resident foreign corporation’s trade or business in the Philippines.
Computation of taxable income
Taxable base
The regular corporate income tax is imposed on taxable income, which is gross income less allowable deductions. For the computation of taxable income, gross income means all income derived from whatever source, unless expressly excluded in the NIRC. Non-resident foreign corporations and non-resident aliens not engaged in trade or business in the Philippines are not entitled to deductions from gross income. Further, certain types of income, such as passive income, are subject to tax based on gross income.
The MCIT is imposed on gross income. For purposes of applying the MCIT, the term “gross income” shall mean gross sales less sales returns, discounts and allowances and cost of goods sold.
Deductions
Under the NIRC, the allowable deductions from gross income include: ordinary and necessary trade, business or professional expenses; interest; taxes (except income tax, income tax imposed by authority of any foreign country, estate and donor’s taxes, taxes assessed against local benefits of a kind tending to increase the value of the property assessed); losses; bad debts; depreciation; depletion of oil and gas wells and mines; charitable contributions; research and development; and pension trusts.
Instead of itemized deductions, a corporation may avail of the optional standard deduction in an amount not exceeding 40% of its gross income.
Income tax reporting
Corporations must file an annual (final adjustment) tax return with the BIR on or before the 15th day of the 4th month following the close of the taxpayer’s taxable year. The corporation must also file quarterly income tax returns for the first 3 quarters of the fiscal year, on or before the 15th of the second month after the close of each quarter, and pay the estimated income tax for the period.
Cross-border payments
Transfer pricing
The Commissioner of Internal Revenue is authorized to make transfer pricing adjustments to ensure that taxpayers clearly reflect income attributable to controlled transactions and to prevent the avoidance of taxes with respect to such transactions. The BIR’s Transfer Pricing Guidelines apply the arm's length principle for cross-border and domestic transactions between associate enterprises, which requires the transaction with a related party to be made under comparable conditions and circ*mstances as a transaction with an independent party. The guidelines are based on the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines.
Withholding tax
There are generally 2 categories of withholding taxes under the Philippine withholding tax system, i.e, (i) the creditable withholding tax (CWT), and (ii) the final withholding tax (FWT).
The CWT constitutes advance payment of taxes, which are creditable against the taxes determined at the end of the taxable period. It includes:
- Withholding tax on compensation, which is the tax withheld from income payments to individuals arising from an employer-employee relationship;
- Expanded withholding tax, which is the withholding tax prescribed on certain income payments and is creditable against the income tax due from the payee for the taxable quarter/year in which the particular income was earned;
- Withholding tax on goverment money payments - Value Added Taxes (GVAT), which is the tax withheld by national government agencies and instrumentalities, including government-owned and controlled corporations, and local government units, before making any payments to VAT registered taxpayers/suppliers/payees on account of their purchases of goods and services; and
- Withholding tax on government money payments (GMP) - Percentage Taxes, which is the tax withheld by national government agencies and instrumentalities, including government-owned and controlled corporations, and local government units, before making any payments to non-VAT registered taxpayers/suppliers/payees.
On the other hand, the final withholding tax (FWT) is a type of withholding tax which is prescribed on certain income payments and is not creditable against the income tax due from the payee for the taxable year. Income tax withheld constitutes the full and final payment of the income tax due from the payee on the particular income subjected to final withholding tax.
Gross income derived from all sources within the Philippines by non-resident foreign corporations and non-resident aliens not engaged in trade or business in the Philippines, such as interests, dividends, rents, royalties, and service fees are subject to FWT. The income tax rates, and consequently the withholding tax rates, may be reduced by an applicable tax-treaty concluded with the Republic of the Philippines.
Aside from the FWT on the non-resident’s income tax, certain payments to non-resident foreign corporations and non-resident aliens not engaged in trade or business in the Philippines are also subject to final withholding VAT. This includes payment for royalties, rents, and service fees.
Multilateral Instrument
A non-resident foreign taxpayer entitled to preferential tax rate or tax exemption under a valid tax treaty entered into by the Philippines with another Contracting State may confirm its entitlement by filing a tax treaty relief application (TTRA) or request for confirmation (RFCs) with the International Tax Affairs Division (ITAD) of the BIR.
Pursuant to the tax treaties entered into by the Philippine government, competent authorities of a Contracting State are empowered to exchange information that is foreseeably relevant for the administration or enforcement of their domestic laws concerning taxes of every kind and description, or implement their treaty provisions, protect their tax base and combat tax evasion. These shall include, but are not limited to, bank, property or ownership, financial or accounting and tax information. The BIR is authorized to obtain and exchange information on bank deposits and other information held by financial institutions pursuant to international conventions or agreements where the Philippines is a signatory thereto, for purposes of tax assessment, verification, audit and enforcement.
The Philippines is not yet a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. Rather, the Philippines relies on the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, other international exchange of information agreements, the provisions in its existing income tax treaties, and the provisions of its domestic law to implement the BEPS standards.
International tax reform
The Philippines is not a member of the OECD, and has not taken steps to adopt the OECD Base Erosion and Profit Shifting (BEPS) two-pillar solution.
Payroll taxes
Withholding tax on compensation and fringe benefits
All remuneration for services performed by an employee for their employer under an employee-employer relationship, unless exempted by the NIRC and pertinent laws, is subject to income tax. The employer is required to withhold the tax due from the employee and remit the same to the BIR. Employees earning purely compensation income from only one employer, where such income is derived from sources within the Philippines and properly subjected to withholding tax by the employer, are not required to file an income tax return.
The employer shall likewise file its fringe benefits tax returns, and pay the fringe benefits tax on fringe benefits paid to supervisory and managerial employees. Fringe benefit means any good, service, or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual employee (except rank and file employee) such as, but not limited to the following: (i) housing; (ii) expense account; (iii) vehicle of any kind; (iv) household personnel, such as maids, drivers and others; (v) interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; (vi) membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; (vii) expenses for foreign travel; (viii) holiday and vacation expenses; (ix) educational assistance to the employee or his dependents; and (x) life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.
The fringe benefits tax is computed by determining the grossed-up value of the fringe benefit by dividing the actual monetary value by 65%, then multiplying the grossed-up value by 35% to get the fringe benefit tax. In general, the computation of the fringe benefits tax would entail (i) valuation of the benefit granted and (ii) determination of the proportion or percentage of the benefit which is subject to the fringe benefit tax. The NIRC and regulations allow for only a portion of the fringe benefit to be subjected to the fringe benefit tax where the fringe benefits redound to the joint benefit of the employer and employee.
The Philippines social security and pension plan
Employers are obliged to pay the employers’ contributions to the: (i) Social Security System (SSS), inclusive of contributions to the Employees Compensation Program (EC); (ii) Home Development Mutual Fund (HDMF), more popularly known as the Pag-IBIG Fund, and (iii) Philippine Health Insurance Corporation (Philhealth). The employees have a corresponding share in the contributions, except for the contributions to the EC which are all paid by the employer.
The SSS administers social security benefits for employees and workers in the private sector. Pursuant to its charter, coverage in the SSS shall be compulsory upon all employees not over 60 years of age, and their employers. Social security benefits administered by the SSS cover sickness, maternity, retirement and pension benefits, unemployment insurance, disability, death and funeral benefits of private employees. Benefits received from or enjoyed under the SSS are excluded from the definition of gross income, and are not subject to income tax.
The Home Development Mutual Fund is a national savings program aimed at providing housing to Filipinos. Members, including employees with regular contributions to HDMF, may secure affordable loans for housing and other purposes.
Philhealth provides universal health insurance coverage for all Filipinos.
Retirement pay and employers’ retirement plan
An employee may retire upon reaching the retirement age established by in the collective bargaining agreement or employment contract. In the absence of a retirement plan, the optional retirement age is 60 years of age while the compulsory retirement age is 65 years of age.
On their retirement, employees shall be entitled to retirement benefits earned under existing laws and any collective bargaining agreements or other agreements. Benefits under these agreements shall not be less than those provided by law.
In case there is no established retirement plan between the employer and its employees, a retiring employee that has reached the optional or compulsory retirement age and has served for a minimum of 5 years of service in the establishment, may retire and shall be entitled to retirement pay equivalent to at least ½ month salary for every year of service. In the computation of the retirement pay, a fraction of at least 6 months of service shall be considered as one whole year.
Retirement benefits received under the Labor Code, and those received by officials and employees of private firms in accordance with a reasonable private benefit plan maintained by the employer are tax exempt provided that the retiring official or employee has been in the service of the same employer for at least 10 years and is not less than 50 years of age at the time of his retirement.Additionally the benefits granted shall be availed of by an official or employee only once. The term “reasonable private benefit plan” means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of the employer’s officials or employees. The contributions made by the employer are for the benefit of the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated. However, it must be reflected in the plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees.
Indirect taxes
Value Added Tax
VAT is an indirect tax imposed on (i) the sale, barter, exchange, or lease of goods or properties in the course of business; (ii) the rendering of services in the course of business; and (iii) the importation of goods whether or not in the course of business. Transactions “in the course of trade or business” refer to the regular conduct or pursuit of a commercial or an economic activity, as well as to any transactions incidental thereto.
Gross receipts derived by non-residents from sale of service in the Philippines are subject to VAT, the rule on regularity notwithstanding.
Any excess of output tax over input tax must be paid by the VAT-registered person to the BIR. Any excess of input tax over output tax is to be carried over to succeeding tax quarters. “Input tax” refers to the VAT paid by a VAT-registered person in the course of his trade or business on the importation of goods or local purchase of goods or services from a VAT-registered person. “Output tax” means the value-added tax due on the sale or lease of taxable goods or properties or services by any VAT-registered person.
There are three applicable rates of VAT, depending on the nature of the transaction upon which the tax is to be imposed:
- Taxable transactions at the current rate of 12%;
- Zero-rated transactions taxable at 0%; and
- Transactions exempt from VAT.
Taxpayers liable for VAT on transactions that are zero-rated may receive a refund of creditable input tax, to the extent that input tax has not been applied against output tax, provided that the refund is claimed within 2 years after the close of the quarter during which such transaction was made. This benefit, however, does not apply to VAT-exempt transactions.
Percentage Tax
A percentage tax is a national tax measured by a certain percentage of the gross selling price or gross value in money of goods sold, bartered, or imported, or a certain percentage of the gross receipts or earnings derived by any person engaged in the sale of services.
Percentage taxes are applicable only in specific instances and at specific rates, as provided for under Title V of the NIRC. These include percentage taxes on
- VAT-exempt persons;
- Domestic and international carriers;
- Franchises on radio and/or television broadcasting companies;
- Overseas dispatch, messages, or conversations transmitted from the Philippines;
- Banks and non-bank financial intermediaries;
- Life insurance premiums;
- Agents of foreign insurance companies;
- Amusem*nt taxes;
- Gross gaming revenue or receipts; and
- The sale, barter, or exchange of shares of stocks listed and traded through the local stock exchange other than the sale by a dealer in securities.
Local government taxes
Local Taxes
In line with the autonomy bestowed upon LGUs by the 1987 Constitution, fiscal decentralization grants provinces, cities, municipalities, and barangays the power to create their own sources of revenue and to levy taxes, fees, and charges that accrue exclusively to the local taxing entity.
Local taxation is, however, subject to certain guidelines and limitations imposed by Congress. These include the requirement that such taxes be (ia) uniform, equitable, and based on the taxpayer’s ability to pay; (ii) levied only for public purposes; (iii) not contrary to law, public policy, national economic policy, or in restraint of trade; (iv) collected only by public officers; and (v) in accordance with a progressive system of taxation.
The Local Government Code (LGC), has prohibited local governments from levying certain taxes, including those already imposed by the NIRC (e.g., income tax; documentary stamp tax; estate tax; customs duties; charges on local passage; excise taxes; percentage taxes; VAT, etc.). The LGC expressly enumerated the types of taxes that each LGU may levy.
Provinces may thus impose taxes on (i) the transfer of real property; (ii) printing and/or publication; (iii) businesses enjoying franchises; (iv) sand, gravel, and quarry resources extracted from public lands within their territorial jurisdiction; (v) persons engaged in the practice of a profession; (vi) theaters, cinemas, concert halls, circuses, and other places of amusem*nt; and (vii) delivery vehicles for specific products.
Municipalities may levy taxes, fees, and charges not otherwise levied by provinces, including (i) business taxes; (ii) fees for sealing and licensing of weights and measures; and (iii) fishery rentals.
Cities may impose the taxes that may be imposed by provinces and municipalities. The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than 50%, except the rates of professional and amusem*nt taxes.
Barangays may impose taxes on (i) stores or retailers with fixed business establishments; (ii) services rendered in connection with the use of barangay-owned property or service facilities; (iii) co*ckpits, fighting co*cks, and commercial breeding thereof; (iv) places of recreation that charge admission fees; and (v) advertisem*nts.
Local (Real Property) Transfer Tax
The LGC permits provinces, cities, and municipalities within Metro Manila, to impose a tax on the sale, donation, or barter of real property, or on any other mode of transferring title thereto (including by inheritance or succession). This local transfer tax on real property may not, however, exceed 50% of 1% of either (i) the total consideration involved in the acquisition thereof or (ii) the fair market value of the real property in case such monetary consideration is insubstantial, depending on which is higher.
While the LGC prohibits LGUs from levying estate or donor’s tax, LGUs are nevertheless permitted to impose the local transfer tax on the disposition of real property, whether the same be by sale, donation, or succession. The seller, donor, transferor, executor, or administrator must pay the local transfer tax within 60 days from execution of the deed or from the date of the decedent’s death.
Payment of the local transfer tax and presentation of evidence thereof are required before the registration of any deed, as well as before cancellation of an old title and tax declaration and issuance of a new one in its place.
Local Real Property Tax
The appraisal, assessment, and collection of real property tax (RPT) is based on the property’s current and fair market value. Assessment must be conducted according to a uniform classification and on the basis of actual use, regardless of the property’s location and the identity of its owner or the person using the same.
For purposes of the RPT, real property may be classified as residential, agricultural, commercial, industrial, mineral, timberland, or special. The classification of the property determines its assessment level, which, multiplied by the fair market value of the real property, would constitute the tax base for the RPT (the assessed value). The LGC requires all natural or juridical persons owning or administering real property and improvements thereon within a city or municipality to prepare and file a sworn statement declaring the true value of their property, which shall be the current and fair market value. Assessment levels to be applied to the fair market value of real property for the determination of the assessed value are to be fixed by local ordinances of the sanggunian concerned, but not to exceed the rates prescribed in the LGC.
