Tax Reform for
Sustainable Growth
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The
Philippine Government's Comprehensive Tax Reform Program (CTRP) was one of the important
requirements for departure from IMF supervision. The program was first proposed in 1996,
but it was not until December 1997 that the final component of the CTRP was passed.
Tax reform was seen as necessary for the expansion of the country's tax base thereby
increasing revenue and permitting expansion of infrastructure spending and national
savings. ln short, tax reform was seen as critical for maintaining the healthy fiscal
standing of the Government.
The passage of the CTRP was fraught with delay. At times the CTRP was criticized by the
IMF as being a watered-down version of the initial proposals. The Tax Reform Act of 1997
(TRA), the result of nearly two years of discussion and debate, was finally passed on
December 11, 1997 and became effective January 1, 1998.
The following discussion outlines the provisions on corporate and individual taxation
under the TRA.
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| Corporate
Taxation |
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| Scope |
For tax
purposes, corporations are classified as domestic or foreign depending on the place of
incorporation or organization. A foreign corporation is either resident or nonresident.
A domestic corporation is a corporation organized under Philippine laws. A foreign
corporation is considered a resident of the Philippines if it is engaged in trade or
business in the Philippines (e.g., through a branch). |
Taxes on Corporation Income
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Domestic
Corporations and Resident Foreign Corporations Rates
The regular corporate income tax rate, which applies to both domestic and resident foreign
corporations, is 34%. Effective January 1, 1999, this rate will be decreased to 33%; and
on January 1, 2000 and onwards to 32%. Preferential rates are shown in Tables 13 and 14. For domestic corporations, the tax base is net
world-wide income while for resident foreign corporations, the tax base is net
Philippine-source income.
Minimum Corporate IncomeTax (MCIT)
Beginning on the fourth taxable year from the time a corporation commences its business
operations, an MCIT of 2% of the gross income as of the end of the taxable year shall be
imposed, if the MCIT is greater than the regular corporate income tax. Any excess of the
MCIT over the normal tax shall be carried forward and credited against the normal income
tax for the three immediately succeeding taxable years.
Capital Gains
For domestic and resident foreign corporations, capital gains are generally subject to the
regular corporate income tax rate of 34% beginning 1998; 33% beginning 1999; and 32%
beginning 2000 and onwards. However, net capital gains from the sale or exchange of shares
of stock not Iisted and traded in the local stock exchange are subject to a capital gains
tax or 5% on net capital gains not exceeding P 100,000 and 10% on the excess. If the
shares sold are listed and traded through the stock exchange, the tax shall be 1/2 of 1%
of the gross selling price.
On sale or exchange of land or buildings not actually used in business and treated as
capital asset, the capital gains tax is 6% of the gross selling price or fair market
value, whichever is higher.
Fringe Benefits Tax
Fringe benefits granted to supervisory and managerial employees are subject to a tax of
34% (33% effective January 1, 1999; and 32% effective January 1, 2000) of the grossed-up
monetary value of the fringe benefit. The grossed-up monetary value of the fringe benefit
is determined by dividing the actual monetary value of the fringe benefit by 66% (67%
effective January 1, 1999; and 68% effective January 1, 2000).
Fringe benefits given by OBUs, regional or area headquarters,
regional operating headquarters of multinational companies, petroleum contractors and
subcontractors are taxed at 15% of the grossed-up monetary value of the fringe benefit,
which is determined by dividing the actual monetary value of the fringe benefit by 85%.
The fringe benefits tax is payable by the employer. However, fringe benefits which are
required by the nature of, or which are necessary to, the trade, business, or profession
of the employer or which are for the convenience of the employer are not taxable.
Branch Profits
Any profit remitted by a branch (except those activities registered with the Philippine
Economic Zone Authority [PEZA]) to its head office is subject to a tax of 15%. The tax is
based on the total profits applied or earmarked for remittance without any deduction for
the tax component thereof.
Improperly Accumulated Earnings
The TRA imposes a tax of 10% on the improperly accumulated earnings of a corporation,
except in the case of publicly held corporations, banks and other non-bank financial
intermediaries and insurance companies. The fact that earnings or profits of a corporation
are permitted to accumulate beyond the reasonable needs of a corporation shall be
considered for the purpose of avoidance of tax on shareholders, unless proven to the
contrary.
Nonresident Corporations
Rates
Generally, Philippine-source income of nonresident foreign corporations such as dividends,
rents, royalties, compensation, remuneration for technical services, and capital gains are
subject to a tax of 34% beginning 1998, 13% beginning 1999, 32% beginning 2000 and onwards
on the gross amount. This tax is withheld at source. Preferential rates are shown in Table 15.
Capital Gains
Capital gains realized by a nonresident foreign corporation from the sale of shares of
stock in a domestic corporation are taxed in the same manner and at the same rate as
domestic and resident foreign corporations.
Tax-Year/Timing of Tax Payment
Corporate taxpayers may use the calendar year ending on December 31 as their taxable year.
However, fiscal years may also be adopted.
All corporations subject to income tax must file quarterly income tax returns on a
cumulative basis for the preceding quarter/s upon which their income tax is paid. The
quarterly return for the first three quarters must be filed and the tax thereon must be
paid not later than 60 days after the close of each quarter. A final adjustment return
covering the total net taxable income must be filed on or before the fifteenth day of the
fourth month following the close of the fiscal year.
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Table13 Preferential Income Tax
Rates on Passive Income of Domestic/Resident Foreign Corporations |
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Dividends received by a
domestic or resident foreign corporation from another domestic corporation |
Not subject to tax
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| Interest on any currency
bank deposit and yield or other monetary benefit from deposit substitutes and from trust
fund and similar arrangements |
20% final tax |
Interest from depository
bank under expanded foreign currency deposit (FCD) system
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7-1/2% final tax |
| Royalties |
20% final tax |
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Table 14 Preferential Income Tax
Rates for Certain Domestic/Resident Foreign Corporations |
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International carriers |
2-1/2% final
tax on gross Philippine billings (in addition, there is a 3% common carrier's tax on the
same tax base) |
| Proprietary educational
institutions and nonprofit hospitals |
10%
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| Income derived by a
depository bank, under the expanded FCD system, foreign currency deposit units (FCDUs),
and offshore banking units (OBUs) |
10% final
tax on income from foreign currency transactions with local commercial banks including
branches of foreign banks authorized by the Bangko Sentral ng Pilipinas to transact
business with FCDUs and other depository banks under the FCD system, including interest on
foreign currency loans granted under the expanded FCD system to residents |
| Regional/area
headquarters |
Exempt |
| Regional operating
headquarters |
10% of
taxable income
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Taxable Fringe Benefits
- Housing
- Expense account
- Vehicle of any kind
- Household personnel such as maid, driver, and others
- Interest on loan at less than market rate to the extent of the
difference between the market rate and actual rate granted
- Membership fees, dues, and other expenses borne by the
employer for the employee in social and athletic clubs or other similar organizations
- Expenses for foreign travel Holiday and vacation expenses
- Educational assistance to the employee or his dependents
- Life or health insurance and other non-life insurance premiums
or similar amounts in excess of what the law allows
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Nontaxable Fringe Benefits
- Fringe benefits which are authorized and exempted from tax
under special laws
- Contributions of the employer for the benefit of the employee
to retirement, insurance, and hospitalization benefit plans
- Benefits given to rank and file employees, whether granted
under a collective bargaining agreement or not
- De minimis benefits defined under rules and
regulations to be promulgated by the Secretary of Finance, upon the recommendation of the
BIR Commissioner
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Table 15 Preferential Income
Tax Rates for Nonresident Corporations |
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| Interest on foreign loans |
20% |
| Dividends received from domestic corporations
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Regular corporate income tax rate. This is
reduced to 15% if the recipient foreign corporation is a resident of a country
which:
i) does not impose any tax on dividends received from foreign sources; or
ii) allows a credit against the tax due from the nonresident foreign corporation
taxes deemed to have been paid in the Philippines equivalent to 19% for 1998, 18% for
1999, and 17% for 2000 and onwards. These represent the difference between the
regular corporate income tax for such years and the 15% tax on
dividends. |
Income derived from any foreign currency
transactions with depository banks under
the expanded FCD system, FCDUs, and OBUs
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Exempt
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Rents and other fees paid to nonresident
corporate lessors of aircraft, machinery, and other equipment
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7-1/2% on gross rentals or fees
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Rents or charter fees paid to nonresident
corporate owners of vessels chartered by Philippine nationals
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4-1/2% on gross rentals or fees
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Fees paid to nonresident cinematographic film
owners or lessors
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25% on gross income
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Gross income of subcontractors of petroleum
service contractors
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8% in lieu of all other taxes |
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| Calculation of Taxable Income |
Itemized
Deductions
Domestic and resident foreign corporations are allowed to claim various itemized
deductions from their gross income, including ordinary and necessary business expenses.
Foreign Income
The foreign income of a domestic corporation is taxable. Double taxation is avoided
through the tax credit of foreign taxes paid. The availability of tax credits is, however,
subject to the per country and overall limitations. Alternatively, taxpayers may elect to
claim the foreign tax as a deduction from taxable income.
Losses/Group Relief
Business-related losses during the taxable year which have not been compensated for by
insurance or other forms of indemnity are allowed to be taken as deductions.
No deduction is allowed for losses from transactions between certain related parties. The
Commissioner of Internal Revenue has the power to allocate and adjust certain items of
income and deduction among related taxpayers. Transfer prices between related parties are
carefully examined to make sure that these are at arm's length and reasonable under the
circumstances.
Subject to certain conditions, net operating loss in a taxable year is allowed to be
carried over to the next three succeeding years following the year of loss.Capital Gains/Loss
Capital gains are gains arising from the sale or exchange of capital assets. Losses from
the sale or exchange of capital assests are deductible but only to the extent of capital
gains. |
| Withholding Tax |
Wages
The tax due on compensation income received by individuals must be withheld by every
employer. Individuals are allowed to claim certain personal and additional exemptions on
their status and number of dependents.Expanded
Withholding Tax (EWT) System - Resident Recipient
A creditable tax must be withheld under the EWT system on specified income payments to
residents of the Philippines. The tax withheld is creditable against the income tax
liability of the recipient of the income. Some payments subject to EWT are show it in Table 16.
Nonresident Recipient/Foreign Corporations Withholding Tax
All remittances of interest, dividends, rents, royalties, premiums, compensation,
remuneration for technical services, or other fixed or determinable annual, periodic, or
casual gains and income, including capital gains from sources within the Philippines, are
subject to withholding tax on the gross amount.
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Table 16 Payments Subject to
EWT |
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- payments to individuals practicing profession (10%); payments
to contractors (1%); professional fees and other remuneration to juridical persons other
than general professional partnerships (5%);
- Rentals of real property (5%); and
- Gross selling price on the sales of real property (subject to
the 2-1/2%, 5%, or 7- 1/2% EWT depending on the business of the seller)
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Repatriation of Profit
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Restrictions
Full and immediate repatriation and remittance of investmerits and profits without prior
BSP approval is allowed. However, capital and profits on foreign investment registered
with the BSP are allowed to be repatriated using foreign currency purchased from the
banking system.
Remittance of Royalties, Technical Services, Management Fees
Royalties technical service fees and management fees may be remitted without prior
approval of the BSP.
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Tax Incentives
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Companies
engaged in preferred areas of activities and registered with the Board of Investments
(BOI) in accordance with the provisions of the Omnibus Investments Code are entitled to
certain tax and non-tax incentives.
Among the tax incentives are income tax holiday and tax credit for taxes and duties on raw
materials used in the production of goods for export.
Regional or area headquarters, regional operating headquarters, their expatriate
employees, and their Filipino employees holding the same positions as the expatriate
employees enjoy certain incentives.
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| Indirect Taxes |
Value-Added
Tax (VAT)
In general, the 10% VAT is imposed on the sale of goods and other properties and services
in the Philippines. The importation of goods to the Philippines is also subject to VAT.
The VAT is 0% on certain transactions such as export sales of goods and sales of services
to nonresidents paid for in foreign currency and accounted for in accordance with the
rules and regulations of the BSP.
VAT is imposed on the gross selling price (in case of sale of goods) and gross receipts
(in case of sale of services). For importation, the tax is based on the total value used
by the Bureau of Customs in determining tariff and customs duties. VAT paid by a
VAT-registered person on his purchase or importation of goods or services (input tax) is
creditable against the tax due on his own sale of goods and services (output tax).
Excise Taxes
Excise taxes are imposed on certain goods (such as cigarettes, liquor, and motor vehicles)
manufactured or produced in the Philippines for domestic sale or consumption or for any
other disposition. Excise taxes are also imposed on certain imported goods, in addition to
the VAT and customs duties.Percentage Tax on
Business
Persons or entities subject to percentage taxes include domestic common carriers of
passengers, international carriers, and those in the banking and finance, life insurance
and amusement business (see samples in Table 17). This tax is
imposed on gross receipts or gross income.
A percentage tax of 3% is imposed on non-VAT registered
persons whose gross sales or gross receipts do not exceed P550,000.
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Table 17 Selected Percentage Tax Rates |
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Types
of Business |
Percentage Tax Rate |
| Banks - income from
lending and financial easing activities |
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1%, 3%, or 5% of gross
receipts depending on the maturity date of the instruments; tax-exempt if maturity period
is over seven years |
| Life insurance companies
doing business in the Philippines |
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5% of the total premiums
collected |
| Electric, water, and gas
utilities |
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2% of gross receipts |
| Domestic common carriers
of passengers |
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3% of gross receipts
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| International carriers |
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3% of gross receipts |
| Finance companies -
income from lending and financial leasing activities |
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1%, 3%, or 5% of gross
receipts depending on the maturity date of the instruments; tax-exempt if maturity period
is over seven years
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Stock
Transaction Tax
A stock transaction tax (STT) of 1/2 of 1% of gross selling price is imposed on the sale,
barter, exchange, or other disposition of shares through the facilities of the stock
exchange. The STT is also imposed on the sale, barter, exchange, or other disposition of
shares of stock in closely held corporations through initial public offering (IPO). A
closely held corporation is any corporation in which at least 50% in value of the
outstanding capital stock or at least 50% of the total combined voting power of all
classes of stock entitled to vote is owned directly or indirectly by or for not more than
20 individuals.The tax shall be at the
following rates in accordance with the proportion of the shares sold, bartered, exchanged,
or otherwise disposed of to the total outstanding shares of stock after the Iisting in the
local stock exchange:
| Up to 25% |
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4% |
| Over 25% but not over 33-1/3% |
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2% |
| Over 33-1/3% |
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1% |
The tax base shalI be the gross selIing price
or gross value in money of the shares of stock sold, bartered, exchanged, or otherwise
disposed of.
Documentary Stamp Tax
The documentary stamp tax is an excise tax on documents, instruments, loan agreements and
commercial papers, and on acceptances, assignments, sales and transfers of the obligation,
right, or property incident thereto. This tax is imposed on the maker, signor, issuer,
acceptor, or transferor. Table18 shows some of the documents
requiring payment of documentary stamp tax. |
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Table18 Documents Requiring
Documentary Stamps |
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Bank checks |
P1.50 for
each check regardless of amount
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| Debentures
and certificates of indebtedness |
P1.50 for
every P200 of the face value
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| Certificates
of stock |
P2.00 for
every P200 of the par value on original issue. In case of transfers, the tax is P1.50 for
every P200 of the par value |
| Deeds of
sale and conveyances of real property |
P15.00 if
the consideration does not exceed P1,000; additional P15.00 for every P1,000 in excess of
P1,000 of the consideration |
Bonds, loan
agreements, promissory notes, bills of exchange, drafts, instruments and securities issued
by the Government
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P0.30 for
every P200 of the face value |
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Customs Duo
Goods are subject to customs duties upon importation except as otherwise specifically
provided for under the Tariff and Customs Code or special laws. Under the flexible tariff
clause of the Philippine Constitution, the President may be authorized by law to fix,
within specified limits, tariff rates and other duties, within the framework of the
national development program of the Government.
Local Taxes
Under the Local Government Code, local government units (LGUs) are given the authority to
tax all activities except those expressly prohibited by the Code or other laws. Among the
taxes which cannot be levied by LGUs are income tax, customs duties, documentary stamp
tax, and estate and gift taxes. |
Tax Treaties
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The
Philippines has entered into treaties with various countries for the avoidance of double
taxation and prevention of fiscal evasion. Tax treaties with the following countries have
been ratified and are currently in force: Australia, Austria, Belgium, Brazil, Canada,
Denmark, Finland, France, Germany, Indonesia, India, Israel, Italy, Japan, Korea,
Malaysia, the Netherlands, New Zealand, Norway, Pakistan, Singapore, Spain, Sweden,
Thailand, United Kingdom, and the United States. |
| Taxation of Individuals |
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Classification of Taxpayers
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For tax
purposes, individuals are classified into:
- Resident citizens;
- Nonresident citizens;
- Resident aliens;
- Nonresident aliens engaged in trade or business; and
- Nonresident aliens not engaged in trade or business.
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The
residence of an alien is determined by his intentions and by the length and nature of his
stay. An alien who comes to the Philippines for a definite purpose that may be
accomplished promptly is a nonresident. However he may be considered a resident if the
planned duration of his stay is indefinite. The circumstances of each case are considered
in every question involving residency.
Whether a nonresident alien is engaged in trade or business in the Philippines is
determined on the basis of the length of his stay in the Philippines. A nonresident alien
is presumed not to be engaged in trade or business in the Philippines if his aggregate
stay in the country during any calendar year does not exceed 180 days.
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Table 19 Rates of Income Tax on
Citizens and Resident Aliens*
(In Philippine pesos) |
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Amount Subject to Tax
Not over P10,000
Over P10,000 but not over P30.000
Over P30,000 but not over P70.000
Over P70,000 but not over P140,000
Over P140,000 but not over P250,000
Over P250,000 but not over P500,000
Over P500,000
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Applicable Rate
5%
P500 + 10% of the excess over P10,000
P2,500 + 15% of the excess over P30,000
P8,500 + 20% of the excess over P70,000
P22,500 + 25% of the excess over P140,000
P50,000 + 30% of the excess over P250,000
P125,000 + 34% of the excess over P500,000 for 1998 (33% for 1999; 32% for 2000 and
onwards)
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| *Applicable to resident
citizens and resident aliens whether engaged in trade or business, practising profession,
or employed. |
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| Scope and Rates of Tax |
Resident
Citizens and Resident Aliens
Resident citizens are taxed on their coin pensation, business, and other income from
sources within and without the Philippines. Resident aliens are taxed only on income
derived from sources within the Philippines.
Compensation Income
Income derived from an employer-employee relationship is subject to tax ranging from 5% to
34% (See Table 19). Taxable compensation income includes salaries,
wages, bonuses, allowances, tax reimbursements, and most fringe benefits.
Citizens employed by regional or area headquarters and regional operating headquarters of
multinational companies offshore banking units, and petroleum service contractors who
occupy the same position as aliens employed by these entities are subject to a final tax
of 15% on their gross income.
Business Income
Income (after allowable deductions) of citizens and resident aliens derived from trade,
business or practice of profession is also subject to the graduated 5% to 34% income tax.
In lieu of the allowed itemized deductions, citizens and resident aliens engaged in trade
or business or practising a profession may elect a standard deduction in an amount not
exceeding 10% of their gross income.
Personal and Additional Exemptions
Individual taxpayers are entitled to personal exemptions: P20,000 for single individuals;
P25,000 for heads of families; and P32,000 each for married individuals. A married
individual or head of a family is allowed an additional exemption of P8,000 for each
dependent not exceeding four.
Married individuals are required to compute their individual income tax returns
separately. The additional exemption for each dependent shall be claimed only by the
husband unless he waives the right in favor of his wife.
Passive Income
Interest on any currency bank deposit and yield or other monetary benefit from deposit
substitutes and from trust fund and similar arrangements is subject to a 20% final tax.
Interest from depository bank under the expanded Foreign Currency Deposit (FCD), system is
subject to a 7-1/2% final tax. Interest earned by an individual from long-term deposits or
investments is exempt from tax. However, if the depositor or investor preterminates the
deposit or investment before the fifth year, a final tax is imposed in accordance with the
following schedule:
4 years to less than 5 years
3 years to less than 4 years
Less than 3 years |
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5%
12%
20% |
Royalties are generally taxed at 20%; 10%, if
from books, literary works, and musical compositions. Prizes exceeding P10,000 and other
winnings (except Philippine Charity Sweepstakes and Lotto winnings) are taxed at 20%.
A final tax of 8% for 1999 (and 10% for 2000 and onwards) is imposed on dividends received
from domestic corporations.
Net capital gains from the sale of capital asset held by an individual are fully taxable
if the capital asset was held for 12 months or less, and 50% taxable if it was held for
more than 12 months.
Net capital gains from the sale of stocks in a domestic corporation are taxed at rates
depending on whether the stocks are listed and traded in the stock exchange. If the stocks
are unlisted or listed but not traded in the stock exchange, the tax is 5% for the first
P100, 000 of net capital gains and 10% for the excess over P100, 000. If the stocks are
listed and traded in the stock exchange, the presumed gain is taxed at 1/2 of I % of the
gross selling price of such shares.
Presumed capital gains from sale of real property held as a capital asset located in the
Philippines are taxed at 6% of the gross selling price or the fair market value, whichever
is higher. Gains from the sale of principal residence by natural persons may quailfy for
exemption from the 6% capital gains tax if the proceeds from such sale are fully utilized
in acquiring or building a new principal residence within 18 calendar months from the date
of sale.
Nonresident Citizens
A nonresident citizen is a citizen of the Philippines who:
- establishes to the satisfaction of the Commissioner the fact
of his physical presence abroad with a definite intention to reside therein;
- leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis.
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Nonresident citizens, including those working and deriving
income from abroad as overseas contract workers and seamen who derive compensation for
services rendered abroad as members of a complement of vessels engaged exclusively in
international trade, are taxed only on income derived from sources within the Philippines
at the rate of 5% to 34% (see Table 19).
Income derived by nonresident citizens from any foreign currency transactions with
depository banks under the expanded FCD system and from OBUs is exempt from tax.
Nonresident Aliens
Nonresident aliens engaged in trade or business in the Philippines are taxed in the same
manner as citizens and resident aliens but only on Philippine-source income. They are
entitled to personal exemptions (but not to additional exemptions) only by way of
reciprocity. Dividends, share in the net profits of a taxable partnership, interests,
royalties (in any form), and prizes exceeding P10, 000 are taxed at 20% of the total
amount. However, royalties from books and other literary works, and on musical
compositions are subject to a 10% final tax. Similarly, interest from long-term deposits
or investments is tax-exempt, unless the depositor or investor preterminates the same
before the fifth year, in which case a final tax of 5% to 20% is imposed.
Nonresident aliens not engaged in trade or business in the Philippines are subject to flat
tax rate of 25% on all types of Philippine-source income.
Nonresident aliens whether or not engaged in trade or business in the Philippines are
subject to the 5% and 10% final tax on capital gains on sale of shares of stock in
domestic corporation not listed or listed but not traded in the stock exchange and the 6%
final tax on presumed gain from the sale of real property located in the Philippines and
held as capital asset.
Income derived by nonresident aliens from any foreign currency transactions with
depository banks under the expanded FCD system and from OBUs is exempt from tax.
Returns and Payments of Tax
Individuals are generally required to file income tax returns on or before the fifteenth
day of April of each year.
Separate returns for capital gains derived from sale of stock not traded through a local
stock exchange and from sale of property held as a capital asset by individuals must
likewise be filed with the BIR.
Foreign Tax Credit
A citizen can claim a credit or a deduction for taxes paid or accrued to any foreign
country during the taxable year.
A resident alien is entitled to a foreign tax credit if the country of which he is a
citizen grants a similar right to Filipino citizens.
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