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Income Tax in Philippines



Taxes on personal income:

The Philippines taxes its resident citizens on their worldwide income. Non-resident citizens and aliens, whether or not resident in the Philippines, are taxed only on income from sources within the Philippines.

Rates of tax on income of aliens, resident or not, depend on the nature of their income (i.e. compensation income, income subject to final tax, or other income).

Compensation tax rates:

For resident aliens and non-resident aliens doing business and receiving compensation income, the tax rates are as follows:

Taxable Income (Philippine Pesos)
Tax Rate (Per cent)
From
To
0
10,000
5
10,001
30,000
10
30,001
70,000
15
71,001
140,000
20
140,001
250,000
25
250,001
500,000
30
Above 500,000
32

Fringe benefits tax (FBT):

Fringe benefits furnished to managerial and supervisory-level employees by the employer are subject to a final FBT of 32% (in general) on the grossed-up monetary value of the benefits. Managerial employees are those who may mandate and execute management policies to hire, transfer, suspend, lay off, recall, discharge, assign, or discipline employees. Supervisory employees are those who effectively recommend such managerial actions if the exercise of authority on behalf of the employer is not merely routine or clerical in nature but requires the use of independent judgement. The FBT is a final tax payable on a calendar quarterly basis by the employer and deductible as part of fringe benefit expense. Benefits subjected to FBT are not included in employees’ taxable income. See the Income determination section for a description of fringe benefits for FBT purposes.

Tax rates for income subject to final tax:

For resident and non-resident aliens engaged in trade or business in the Philippines, the maximum rate on income subject to final tax (usually passive investment income) is 20%. For non-resident aliens not engaged in trade or business in the Philippines, the rate is a flat 25%.

Tax rates for business income:

For an individual, whether citizen or resident alien, who is self-employed or practices a profession, the tax rates are the same as the compensation tax rates (see above). An individual with taxable compensation income of PHP 1,082,500 and taxable business or professional income of PHP 1,082,500 will have a total taxable income of PHP 2,165,000 and will pay a total individual income tax of PHP 657,800.

In the case of non-resident aliens not doing business in the Philippines, the tax rate is a flat 25% of the gross income received from all sources within the Philippines.

Taxation of expatriates:

Expatriates employed by certain entities or industries enjoy certain tax concessions. These expatriates include alien executives of offshore banking units, service contractors and subcontractors engaged in oil exploration activities, and regional headquarters and regional operating headquarters of multinational companies. They are taxed at 15% on their gross compensation income.

The applicable FBT rate is also 15%. The grossed-up monetary value is determined by dividing the actual value of the benefit by 85%.

The FBT imposed on fringe benefits enjoyed by non-resident aliens not engaged in trade or business within the Philippines is 25% of the grossed-up monetary value of the fringe benefit. The grossed-up monetary value is determined by dividing the actual value of the benefit by 75%.

Employment income:

An alien, whether resident or not, is taxed on compensation income earned from services rendered in the Philippines regardless of where payment is made and whether it is remitted into the Philippines. A non-resident alien is not taxed on compensation income from services performed outside the Philippines. Employment income, from the point of view of a non-resident alien engaged in trade or business in the Philippines, includes all payments for services rendered in the Philippines, such as salaries and bonuses, regardless of where payment was made.

Social security contributions, up to the prescribed amount of maximum mandatory contributions, and union dues paid by employees are not included in gross income and are exempt from taxation.

Fringe benefits:

Fringe benefits furnished to managerial and supervisory-level employees by the employer are subject to FBT. Benefits subjected to FBT are not included in employees’ taxable income.

‘Fringe benefits’ are defined as any goods, services, or other benefits furnished or granted in cash or in kind by an employer to an individual employee, except rank and file employees, such as, but not limited to, the following:

·        Housing.
·        Expense account.
·        Vehicles of any kind.
·        Household personnel (e.g. maid, driver).
·     Interest on a loan at less than the market rate (currently set at 12%) to the extent of the difference between the market rate and the actual rate granted.
·      Membership fees, dues, and other expenses borne by the employer for the employee in social and athletic clubs and similar organisations.
·        Expenses for foreign travel.
·        Holiday and vacation expenses.
·        Educational assistance to the employee and dependants.
·    Premiums for life insurance, health and other non-life insurance, and similar amounts in excess of what the law allows.

The monetary value of benefits in the form of motor vehicles used for both personal and business purposes and housing is equal to 50% of the lease payment or the depreciation value of the property, whichever is applicable. However, if the housing unit is situated in or adjacent (within 50 metres) to the business premises, the benefit is not taxable. Likewise, a motor vehicle used normally for business purposes is not taxable.

The following fringe benefits are not taxable:

·        Fringe benefits required by the nature of or necessary to the trade, business, or profession or for the convenience or advantage of the employer.
·        Benefits authorised by and exempted from tax under special laws.
·        Employer contributions for the benefit of the employee to retirement, insurance, and hospitalisation benefit plans.
·   Benefits given to rank and file employees, whether or not granted under a collective bargaining agreement. However, these are subject to WHT on compensation, unless otherwise tax exempt.
·        De minimis (small value) benefits as defined and enumerated in the rules and regulations.

In general, if a fringe benefit is granted in money or directly paid for by the employer, the value of the fringe benefit is the amount granted or paid for. If furnished in property and ownership thereof is transferred to the employee, the value of the fringe benefit is the fair market value of the property as determined by the Commissioner of Internal Revenue, pursuant to the Commissioner’s power to prescribe real property values. If the fringe benefit is granted or furnished by the employer in the form of a property but ownership is not transferred to the employee, the value of the fringe benefit is equal to the depreciation value of the property.

Capital gains and investment income:

Non-resident aliens are taxed on Philippine-source capital gains, irrespective of their period of stay in the Philippines. The rates are 0.5% of the gross sales for those shares of stocks listed and traded in the stock exchange; 5% on the first PHP 100,000 and 10% on the excess of the net capital gains for unlisted shares of stock, including shares of publicly listed companies that failed to comply with the minimum public ownership (MPO) requirement; and 6% of the higher of the gross sales price or fair market value of real property sold, withheld at the time of sale. Capital losses are deductible only from capital gains. In computing net capital gains or losses from other capital assets, only 50% of the gain or loss is to be taken into account if the capital asset has been held for more than 12 months; otherwise, 100% of the gain or loss is to be considered.

A non-resident alien is also taxed on Philippine-source investment income, such as interest, dividends, and royalties, at the rate of 20% (for those engaged in trade or business in the Philippines) or 25% (for those not engaged in trade or business in the Philippines) as a final tax (or a lower treaty rate). The tax is withheld at source, and the income is not subject to the graduated rates.

Resident aliens are taxed on their Philippine-source income at graduated rates. However, Philippine-source interest and royalties are taxed at 20%. Interest on residents’ deposits under the expanded foreign currency deposit system (FCDU) accounts is taxed at 7.5%, while interest on long-term deposits or investment in the form of savings, common or individual trust funds, and other investments evidenced by certificates, and so on, is exempt from tax, subject to certain conditions. Interest income on FCDU accounts of non-residents is tax exempt. Royalties on literary works and musical compositions are subject to a final tax of 10%. Dividend income received from a domestic corporation is taxed at 10% for resident aliens. Tax rates for capital gains from shares of stock and real property are the same as those for non-resident aliens.

Residence:

For tax purposes, an individual may be classified as one of the following:

·        resident citizen
·        non-resident citizen
·        resident alien
·        non-resident alien engaged in trade or business
·        non-resident alien not engaged in trade or business.

A resident citizen is taxable on all income derived from worldwide sources. For the other categories, the individual is taxable only on income derived from sources within the Philippines. For employment income, the source of income is the place where the services are rendered, regardless of the place of payment, the place where contract was negotiated, or the payer’s place of residence.

A non-resident alien is deemed engaged in trade or business if, in any calendar year, he/she stays in the Philippines for more than 180 days. If the non-resident alien individual’s stay does not exceed 180 days during any calendar year, then he/she is deemed not engaged in trade or business.

For resident citizens, non-resident citizens, resident aliens, and non-resident aliens engaged in trade or business, income tax is calculated on the basis of net taxable income at graduated rates ranging from 5 percent to a maximum of 32 percent.

Non-resident aliens not engaged in trade or business are subject to tax at 25 percent of their gross income.

Tax-exempt income:

Gross income subject to tax does not include the following:

·        statutory minimum wage
·       damages received by an employee or his/her heirs following a judgment or agreement arising out of or related to an employer-employee relationship
·        proceeds of life insurance policies
·        gifts, bequests, and devises
·        compensation for injuries or sickness
·        retirement benefits, pensions, and gratuities
·        interest on tax-exempt government securities
·   thirteenth-month pay and other benefits such as productivity incentives and Christmas bonus subject to the PHP30,000 limit
·        certain other items specifically provided as not taxable including the following:
o   amount received by the insured as return of premium
o   income exempt from treaty
o   certain prizes and awards exempted by law
o   certain prizes and awards in sports competition
o   GSIS, SSS, Medicare, and other contribution
o   gain from sale of bonds, debentures, or other certificate of indebtedness with a maturity of more than five years
o   gains from redemption of shares in mutual fund
o   interest income from long-term deposits or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts, and other investments
o   income of non-residents from transactions with offshore banking units and depository banks under the expanded foreign currency depository system.

Tax administration

Taxable period:

The tax year runs from 1 January to 31 December.

Tax returns:

Unless impracticable, a husband and wife must file one consolidated income tax return, but the tax is computed separately. Income that cannot be definitely attributed or identified as exclusive income of either spouse is divided equally between them. Generally, this results in lower combined tax liability than when the tax is jointly computed.

Substituted filing of returns is mandatory for all qualified employees. Substituted filing is applicable when the employer’s annual return of WHT on compensation and final tax (BIR Form 1604CF) may be considered as the ‘substitute’ income tax return of its employees inasmuch as the information provided in his or her Certificate of Compensation Payment/Tax Withheld (BIR Form 2316) would exactly be the same information contained in Form 1604CF.

Substituted filing, however, will not apply to non-resident aliens engaged in trade or business in the Philippines.

All individual taxpayers who do not qualify for substituted filing are required to file their returns on a calendar-year basis. The return must be filed on or before 15 April of the succeeding year.

Payment of tax:

Generally, the income tax withheld from the salaries or compensation of aliens, resident or not, is equal to their final tax liability on such compensation. If not, the balance must be paid at the time the annual return is filed. In certain cases, income tax liability may be paid in two equal instalments.




Corporate - Taxes on corporate income:

A domestic corporation is subject to tax on its worldwide income. On the other hand, a foreign corporation is subject to tax only on income from Philippine sources.

Domestic corporations:

The following corporate income tax (CIT) rates apply to domestic corporations:

Income
CIT rate(%)
In general, on net income from all sources.
30
Minimum corporate income tax (MCIT) on gross income, beginning in the fourth taxable year following the year of commencement of business operations. MCIT is imposed where the CIT at 30% is less than 2% MCIT on gross income.
2
Proprietary educational institutions and non-profit hospitals, on net income if gross income from unrelated trade, business, and other activities does not exceed 50% of the total gross income from all sources.
10
Non-stock, non-profit educational institutions (all assets and revenues used actually, directly, and exclusively for educational purposes) and other non-profit organisations.
Exempt

Certain passive income from domestic sources is subject to final tax rather than ordinary income tax.

Improperly accumulated earnings tax:

An improperly accumulated earnings tax of 10% is imposed on improperly accumulated income. The tax applies to every corporation formed or used for the purpose of avoiding income tax with respect to its shareholders, or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed. Exceptions are made for publicly held corporations, banks and non-bank financial intermediaries, and insurance companies.

Resident foreign corporations:

Resident foreign corporations (i.e. foreign corporations engaged in trade or business in the Philippines through a branch office) are taxed in the same manner as domestic corporations (except on capital gains on the sale of buildings not used in business, which are taxable as ordinary income), but only on Philippine-source income.

International carriers are subject to an income tax of 2.5% on their gross Philippine billings unless a lower rate is available under an existing tax treaty. Exemption from this tax is also available under international agreements to which the Philippines is a signatory or on the basis of reciprocity in cases where the home country of the international carrier grants income tax exemption to Philippine carriers.

Income of offshore banking units (OBUs) and foreign currency deposit units (FCDUs) of depository banks from foreign currency transactions with non-residents, other OBUs, or FCDUs and local commercial banks (including branches of foreign banks) authorised by the Bangko Sentral ng Pilipinas (central bank) to transact business with OBUs and FCDUs are exempt from all taxes except net income specified by the Secretary of Finance upon recommendation of the Monetary Board. Interest income from foreign currency loans granted to residents other than OBUs or local commercial banks shall be subject to a 10% final income tax.

Regional or area headquarters of multinational corporations that do not earn or derive income from the Philippines, and that act as supervisory, communications, and coordinating centres for their affiliates, subsidiaries, or branches in the Asia-Pacific region and other foreign markets are not subject to CIT.

Regional operating headquarters (ROHQ) pay a tax of 10% on their taxable income. An ROHQ is a branch established in the Philippines by a multinational company that is 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 communication, or business development.

Non-resident foreign corporations:

In general, non-resident foreign corporations are taxed on gross income received from sources within the Philippines at 30%, except for reinsurance premiums, which are exempt. Interest on foreign loans is taxed at 20%. Dividends from domestic corporations, however, are subject to a final WHT at the rate of 15% if the country in which the corporation is domiciled does not impose income tax on such dividends or allows a tax deemed paid credit of 15%.

Lower rates or exemption on the above income may be available under an applicable tax treaty.

Rentals and charter fees payable to non-resident owners of vessels chartered by Philippine nationals are subject to a final tax of 4.5%. Rentals, charters, and other fees derived by non-resident lessors of aircraft, machinery, and other equipment are subject to a final tax of 7.5%.

Income determination

Inventory valuation:

Inventories are generally stated at cost or at the lower of cost or market. Last in first out (LIFO) is not allowed for tax purposes. Generally, the inventory valuation method for tax purposes must conform to that used for financial reporting purposes.

Capital gains:

Capital gains are not generally subject to CIT, but may be subject to capital gains tax.

Dividend income:

Dividends received by a domestic or resident foreign corporation from another domestic corporation are not subject to tax. These dividends are excluded from the taxable income of the recipient.

Dividends received by a non-resident foreign corporation from a domestic corporation are subject to a general final WHT at the rate of 30%. A lower rate of 15% applies if the country in which the corporation is domiciled either does not impose income tax on such dividends or allows a tax deemed paid credit of 15%. Treaty rates ranging from 10% to 25% may also apply if the recipient is a resident of a country with which the Philippines has a tax treaty.

Stock dividends:

A Philippine corporation can distribute stock dividends tax-free, proportionately to all shareholders.

Interest income:

Interest on bank savings, time deposits, deposit substitutes, and money market placements received by domestic or resident foreign corporations from a domestic corporation are subject to a final tax of 20%, while interest income derived from FCDU deposits is subject to a final tax of 7.5%. Such income is excluded from gross income reportable in CIT returns.

Interest income of OBUs and FCDUs from foreign currency loans granted to residents other than OBUs or local commercial banks shall be subject to 10% tax.

Royalty income:

Royalties received by domestic or resident foreign corporations from a domestic corporation are subject to a final tax of 20%.

Other significant items:

Other items exempt from CIT include the following:

·        Proceeds of life insurance policies.
·        Return of policy premium.
·        Gifts, bequests, and devises.
·        Interest on certain government securities.
·        Income exempt under a treaty.
·        Gains from sale, exchange, or retirement of bonds.
·        Gains from redemption of shares of stock in mutual fund companies.

Foreign income:

A Philippine (domestic) corporation is taxed on its worldwide income. A domestic corporation is taxed on income from foreign sources when earned or received, depending on the accounting method used by the taxpayer.

Income earned through a foreign subsidiary is taxed only when paid to a Philippine resident shareholder as a dividend. Meanwhile, income earned through a foreign branch is taxed as it accrues. The losses incurred by the foreign branch are deductible against other income earned by the Philippine corporation.

Double taxation is generally relieved through a credit for foreign taxes. However, a taxpayer can take a deduction for foreign taxes instead, if that leads to a more favourable outcome.

Corporate residence:

A domestic corporation is a corporation that is created or organised under Philippine laws. A foreign corporation that is duly licensed to engage in trade or business within the Philippines is referred to as a ‘resident foreign corporation’.

Permanent establishment (PE):

The business profits provision in most Philippine treaties permits the Philippines to tax only those profits attributable to a PE. While Philippine treaties adopt the United Nations (UN) Model Convention, Organisation for Economic Co-operation and Development (OECD) commentaries have often been cited by tax authorities to support their interpretation of treaty provisions. The main implication is that most Philippine treaties contain a rule deeming a PE to arise when services are performed in the Philippines for a specified period of time.

Tax administration

Taxable period:

The accounting period must follow a 12-month fiscal period but may or may not follow the calendar year. Most Philippine companies have a fiscal year that ends in December or March.

Tax returns:

Corporations should file their returns and compute their income on the basis of an accounting period of 12 months.

Corporate taxpayers file self-assessed returns. Electronic filing and payment of taxes are available under the Electronic Filing and Payment System (eFPS) of the BIR.

The following corporate taxpayers who are not covered by eFPS are required to use Electronic BIR Forms (eBIRForms) in filing their tax returns:

·        Accredited tax agents/practitioners and all their client-taxpayers who authorised them to file on their behalf.
·        Accredited printers of principal and supplementary receipts/invoices.
·        One-time transaction taxpayers.
·        Those who shall file a ‘No Payment’ return, except senior citizen or persons with disabilities filing their own return, employees deriving purely compensation income and the income tax of which has been withheld correctly, employees qualified for substituted filing but opted to file for an income tax return and are filing for purposes of promotion (Philippine National Police and Armed Forces of the Philippines), loans, scholarship, foreign travel requirements, etc.
·        Government-owned or controlled corporations.
·        Local government units, except barangays.
·  Cooperatives registered with the National Electrifications Administration and Local Water Utilities Administrations.

Taxpayers who are required to file their returns using eFPS or eBIRForms but fail to do so shall be subject to a penalty of PHP 1,000 per return and civil penalties equivalent to 25% of the tax due.

A domestic or resident foreign corporation is required to file income tax returns on a quarterly basis. Within 60 days from the close of the first three quarters of its taxable year, the corporation must file a return summarising its gross income and deductions for the year to date. A final annual income tax return must be filed on or before the 15th day of the fourth month following the close of the taxable year.

Corporate taxpayers must file their income tax returns using one of three different forms, depending on their tax regime (i.e. subject only to the regular income tax, tax exempt, or with mixed income subject to multiple tax rates or special/preferential rates).




Payment of tax:

Every corporation files cumulative quarterly income tax returns for the first three quarters and pays the tax due within 60 days after each quarter. A final adjustment return covering the total taxable income of the preceding taxable year must be filed on the 15th day of the fourth month following the close of the taxable year. The balance of the tax due after deducting the quarterly payments must be paid, while the excess may be claimed as a refund or tax credit. Excess estimated quarterly income taxes paid may be carried over and credited against estimated quarterly income tax liabilities for succeeding taxable years. Once the option to carry over has been made, such option is irrevocable, and no cash refund or tax credit certificate (TCC) is allowed, except upon liquidation of the company.

Since additional modes of payment of taxes are now available through credit, debit, and prepaid cards under recently issued Revenue Regulations, taxpayers may choose from the available online payment facilities provided by the Electronic Payment Service Provider (EPSP) to process tax payments. However, only accredited Authorised Agent Banks (AABs) may accept such payments, and accreditation of AABs is subject to compliance with certain conditions under existing Regulations.

Payment of taxes through the Card Payment Facility shall be deemed made on the date and time appearing in the system-generated payment confirmation receipt issued to the taxpayer-cardholder by the AAB-acquirer, provided that the payment was actually received by the BIR. The taxpayer is not relieved of, and has a continuing liability for such taxes, until the payment is actually received by the BIR.

Annual statutory audit:

An annual statutory audit is required for all corporations with authorised capital stock or paid-up capital exceeding PHP 50,000, including branches of foreign corporations. It is also required for any corporation whose gross sales or earnings exceed PHP 150,000 in any quarter.

Statute of limitations:

There is no statutory obligation on the Tax Commissioner to make an assessment for internal revenue taxes, and most taxes are collected based on the taxpayer’s self-calculation. If an assessment is to be issued, however, it must be done within three years from the deadline or the date of actual filing of the return, whichever is later. The taxpayer and the Commissioner can, however, agree in writing to extend this period.

In the case of a false or fraudulent return or of failure to file a return, the tax may be assessed or a proceeding in court for collection may be commenced without assessment at any time within ten years from the discovery of the falsity, fraud, or omission.

Any internal revenue tax that has been assessed within the period of limitation may be collected by distraint or levy or by a proceeding in court within five years following the assessment of the tax.

The prescription periods are suspended in certain circumstances, such as when the offender is absent from the Philippines, when the Commissioner grants a taxpayer’s request for a reinvestigation, or when the taxpayer and the BIR agree to extend the prescriptive period for assessment through a written waiver.

In the case of overpayment of tax, a claim for refund or credit may be filed with the BIR within two years from the date of erroneous payment of the tax. If the claim is denied or no decision is received from the BIR, a petition for review may be filed with the Court of Tax Appeals (CTA). This must be filed before the two-year period expires, and in the case of a denied claim, within 30 days from the receipt of the denial.




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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.








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This blog is Created by CA Anil Kumar Jain.