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business income, and passive income (interests, dividends, royalties, and prizes). In 1998
compensation income tax rates were restructured into 6 bands with marginal rates ranging from
5% to 35%. Exemption levels are 20,000 pesos (about $400) for individuals, and 32,000 pesos
(about $640) for married couples. In 2000, the business income tax rate was lowered from 33%
to 32%. The tax rate on passive income is 30%. For resident foreign corporations, after-tax
profits remitted abroad are subject to a 15% tax, except for corporations registered with the
Philippine Economic Zone Authority (PEZA), the Board of Investment (BOI), the Bases
Conversion Development Authority, or operating in independent special economic zones
(ecozones), all of which are eligible for special tax and customs incentives, exemptions and
reductions designed to attract foreign, new, necessary and/or export-oriented foreign investment.
The Omnibus Investment Code of 1987 lays out tax incentives administered by the BOI of the
Department of Taxation and Development, and the annual Investment Priorities Plan (IPP) sets
out the investment areas, national and regional, to which these incentives currently pertain. In
2002 the national list included export activities, industrial development and mining,
agricultural/fishery production and processing, logistics, drugs and medicine, engineered
products, environmental projects, IT services, Infrastructure, mass housing projects, R and D
activities, social service, tourism, patriotic and documentary motion pictures and new projects
with a minimum cost of $2 million. Special economic zones (SEZs) can be designated as export
processing, free trade and/or information technology (IT) parks, each designation providing a
schedule of tax holidays, exemptions from import duties on capital goods and raw material, and
preferential income tax rates with more favorable treatment accorded pioneer industries over
nonpioneer or expanding companies.
Taxes on transactions include a value-added tax (VAT) of 10%. For smaller businesses not
registered with the VAT a percentage sales tax of 3% to 5% is applied, although higher for
activities involving issues of public morality: cockpits are taxed 18%, caberets, 18% and jai-lai
and racetracks, 30%.
Excise taxes are imposed on selected commodities such as alcoholic beverages, tobacco
products, jewelry and petroleum products. In addition, the government levies a variety of other
taxes, including mining and petroleum taxes, residence taxes, a head tax on immigrants above a
certain age and staying beyond a certain period, document stamp taxes, donor (gift) taxes, estate
taxes, and capital gains taxes. A document stamp tax is charged on stock certificates, proofs of
indebtedness, proofs of ownership, etc, and normally amount to .75% to 1% of the par or face
value of the certificate. A progressive schedule of donor taxes begins with gifts above P 100,000
(about $18,500), and lays out seven bands (2%, 4%, 6%, 8%, 10%, 12%, and 15%) with the top
marginal rate applying to gifts above P 10,000,000 (about $186,520). The progressive estate tax
begins at P 200,000 (about $37,000) and lays out five bands (5%, 8%, 11%, 15% and 20%) up to
P 10,000,000 (about $186,520). The capital gains tax is 6% on real property; 5% on gains of P
100,000 or less from the sale of stock not listed on the stock exchange, and 10% on gains over P
100,000. Some cities, such as Manila, levy their own wholesale and retail sales taxes.
Government revenues in 2001 amounted to 14.8% of GDP, short of total expenditures and net
lending for the year, which came to 19.1% of GDP, leaving a deficit of over 4% of GDP. The US
State Department reports that the main factor underlying the deficit is inadequate revenue
collections due to widespread tax evasion. Attempts by the Bureau of Internal Revenue to
increase compliance have met with strong resistance.
Read more: Taxation - Philippines - import, export, issues, annual, infrastructure
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TAXATION.html#ixzz11SyZz878
THE PHILIPPINES
I. Introduction to the tax system
The laws governing taxation in the Philippines are contained within the National Internal Revenue
Code. This code underwent substantial revision with passage of the Tax Reform Act of 1997. This
law took effect on January 1, 1998.
Taxation is administered through the Bureau of Internal Revenue which comes under the
Department of Finance. The chief executive of the Bureau of Internal Revenue is the
Commissioner who has exclusive and original jurisdiction to interpret the provisions of the code
and other tax laws. The commissioner also has the powers to decide disputed assessments, grant
refunds of taxes, fees and other charges and penalties, modify payment of any internal revenue tax
and abate or cancel a tax liability. Taxpayers can appeal decisions by the Commissioner directly to
the Court of Tax Appeals.
II. Primary tax incentives
A. Tax holiday
The Omnibus Investments Code grants to enterprises that have registered with the Board of
Investments and that qualify under the annual Investments Priority Plan entitlements to
tax holidays of either four or six years. In addition, they are granted tax credits for
purchase of Philippine-made capital equipment and raw materials.
B. Special Economic Zones
There are over thirty special economic zones throughout the Philippines where export
manufacturing firms are encouraged to start operations. Under the Philippine Export
Zone Authority Law, a special economic zone registered enterprise can, in lieu of all
other national and local taxes, pay a tax of 5% of its gross income.
A firm that has registered under the Omnibus Investments Code that is located and
registered to do business within a special economic zone can have a tax holiday for the
first four or six years of its operations, followed by a 5% tax thereafter. The exemption
from national taxes covers all internal revenue taxes, including the Value Added Tax.
III. Tax treaty with the United States
The Philippines has tax treaties with many countries, including the United States, in order to
minimize the effects of double taxation. The business profits of a resident of another
country with whom the Philippines has a tax treaty are taxable in the Philippines only if the
resident has a permanent establishment in the Philippines to which the profits are
attributable.
IV. Primary types of taxation
A. Individual Income Tax
Residents engaged in trade or business are taxed upon their net income (gross income less
allowable deductions and personal exemptions) according to a schedule of rates ranging
from 3% to 33%. The maximum rate will be reduced to 32% on January 1, 2000.
Residency tests are used to determine resident alien status where the resident alien falls
under the Individual Income Tax schedule of rates.
Personal exemptions of the following amounts are allowed on the individual income tax
return:
Single 50,000 pesos
Head of family 50,000 pesos
Married individuals 50,000 pesos
An additional 25,000 pesos exemption is given for each of the first four additional dependents.
B. Passive income
1. Interest
A ‘final’ tax of 20% is imposed on interest income. This tax is withheld at the
source. Exceptions to this are:
i. Interest income from a depositary bank with a Foreign Currency
Deposit Unit is subject to a final tax rate of 7.5%.
ii. Philippine long term investments of over five years are exempt from
tax.
2. Dividends
A final tax of 10% is imposed on cash or property dividends from domestic
corporations, joint stock companies, insurance or mutual funds, or regional
operating headquarters of multinational corporations.
The distributable net income, after tax, of a partnership is subject to the same final
tax as dividends.
3. Capital gains
The tax code imposes a final tax of 5% on net capital gains from the sale of stock in
a domestic corporation up to 100,000 pesos. The tax is 10% for any income
over 100,000 pesos. If the stock is stock exchange listed, a transfer tax of 0.5%
is also imposed.
4. Fringe benefits
Fringe benefits, such as housing, expense accounts, vehicles, household personnel,
membership fees and educational fees are taxable under the fringe benefits tax
and are payable by the employer, who is responsible for withholding it and
remitting it to the government. The fringe benefits tax is 33% (going to 32% on
January 1, 2000) of the grossed-up monetary value of the fringe benefits given to
the employee.
C. Corporation tax
Resident foreign corporations engaged in trade or business in the Philippines are taxed at
the same rates as domestic corporations.
The corporation income tax rate is currently 30%.
Effective January 1, 2000, the tax code includes an option for corporations to be taxed at a
rate of 15% of gross income if the President of the Philippines chooses to enact this
option. If the option is granted by the President, only firms whose proportion of the cost
of sales or receipts from all sources does not exceed 55% may exercise the option. This
method of taxation, once elected, shall be irrevocable for three consecutive years.
Under the Tax Reform Act, the Philippines has also established a Minimum Corporate
Income Tax. Subsequent to the fourth taxable year after a corporation has started its
business, a minimum corporate income tax of 2% of the gross income is imposed if this
amount is greater than the regularly computed tax. This amount can be carried forward
and credited against the normal income tax for the three immediately succeeding taxable
years.
D. Value Added Tax (VAT)
The VAT is equivalent to 12% of the gross selling price or gross value in money of goods
or properties sold, bartered or exchanged. Any excise tax on these goods is also part of
the gross selling price. In the case of imported goods, VAT is based on the total value
of the goods as determined by the Bureau of Customs plus customs duties, excise taxes
and incidental charges. The VAT is an indirect tax. While the obligation to collect and
remit rests with the seller, the cost of the tax may be passed on to the buyer, transferee
or lessee of the goods, properties or services. A VAT registered entity may credit the
VAT paid on purchases of other goods and services against the tax on its current period
sales of goods or services. If the amount of input tax is greater than the amount of
output tax, the excess may be credited against succeeding period output VAT. VAT
registered entities are required to issue an invoice or receipt for every sale and, in
addition to regularly required accounting records, they must maintain subsidiary sales
and purchase journals exclusively for VAT purposes. VAT reports must be submitted
on a quarterly basis, twenty-five days after the end of the quarter. VAT payments must
be made on a monthly basis.
V. Other taxes
Percentage tax (primarily for non-VAT registered entities
Excise tax
Documentary stamp tax
Estate and donor’s (gift) tax
Taxes Other Taxes
Corporate Taxpayers
1. Domestic corporations are taxed at 30% of annual
taxable income from worldwide sources with option for
15% tax on gross income subject to certain conditions.
Domestic corporations are those established under the
laws of the Philippines and include foreign-owned
corporations, otherwise known as subsidiaries.
2. A foreign corporation, whether engaged or not in trade
or business in the Philippines, is taxable on Philippine-
sourced income at the same rates as domestic
corporations. Such foreign corporation engaged in trade
or business in the Philippines (also called resident foreign
corporation) is taxed based on net income with the same
option to pay 15% tax on gross income. On the other
hand, a foreign corporation not engaged in business or
trade in the Philippines (also known as a nonresident
foreign corporation) is taxed based on gross income
received.
3. Profits remitted by a branch of a foreign corporation to
its home office are taxed at the rate of 15%. However,
this tax does not apply to a Philippine branch registered
with PEZA. Dividends declared by a domestic corporation
to its foreign parent are generally taxed at 30%.
However, if the home country of the recipient
corporation allows an additional credit of 17% as tax
deemed paid in the Philippines, the tax is reduced to
15%. Dividends remitted to countries that do not impose
a tax on offshore dividends qualify for this rate. Under
the Philippine tax treaties with Netherlands, Japan,
Germany, Korea and Austria, a preferential tax of 10%
on branch profit remittances is granted. Furthermore,
under the tax treaties with these countries, dividends
paid are subject to 10% tax if the payor-subsidiary is
registered with the BOI or if the beneficial owner of the
dividends is a company which holds a certain percentage
of the capital of the payor subsidiary. Otherwise, the tax
on dividends is 15%.
4. All corporations, whether domestic or foreign, are
subject to capital gains tax on the sale of shares of
stock, in the same manner as individual taxpayers. Other
income items such as interest and royalties are taxed at
various rates. Dividends received by a domestic or
resident foreign corporation from a domestic corporation
are exempt from tax.
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