Taxes
Source:
"How to Invest in the Philippines" by PricewaterhouseCoopers Philippines (printed with permission from author)

Income and Business Taxes

1) What are the income tax rates in the Philippines?

The income tax rates depend upon the classification of the taxpayers.

A) Individual taxpayers

1) Taxable income from employment, business, trade and exercise of profession including casual gains, profits, and prizes of P10,000 or less; except items of income subject to final tax and special treatment, e.g., capital gains and passive income mentioned in items 4 and 5 below, derived by resident citizens from all sources within and without the Philippines are subject to the graduated tax rates of 5% to 32%. The top rate of 32% applies to taxable income in excess of Php 500,000.

Resident aliens and non-resident citizens are subject to the same graduated tax rates but only for income derived from all sources within the Philippines.

2) Non-resident aliens are taxed at 25% of gross income from sources within the Philippines if their stay within the country does not exceed 180 days in a calendar year. Otherwise, they are taxed on the basis of graduated rates as in above.

3) Aliens who are employed by regional or area or regional operating headquarters of multinational corporations, representative offices, offshore banking units, petroleum service contractors and subcontractors are subject to income tax at 15% of their gross income from such employers (e.g.salaries, annuities, honoraria and allowances).

4) Net capital gains realized during each taxable year from the sales of shares of domestic stocks not traded in the Philippine Stock Exchange (PSE) are taxed at the rate of 5% on the first P100,000 gains and 10% on the excess over P100,000. For domestic shares listed and traded in the PSE, the tax is 1/2 of 1% of the gross selling price or gross value in money of the shares of stock sold.

Likewise, there is a tax on shares of stock sold, exchanged or otherwise disposed through initial public offering at the rates of 1%, 2% and 4%, depending on the proportion of the shares sold, exchanged or otherwise disposed to the total outstanding shares after listing of the shares of closely held corporations.

Capital gains on sale of real property are taxed at 6% of gross selling price or fair market value, whichever is higher.

5) Passive income items like interest, dividends, royalties, prizes and other winnings are also taxed at different rates. For instance, dividends received by citizens and residents from a domestic corporation and the share of an individual partner in a taxable partnership are taxed at 8% (10% effective 2000). However, the tax on such dividends shall apply only on income earned on or after January 1, 1998. If the dividends are paid to non-residents, the tax is 20% for those engaged in trade or business and 25% for the others.

B) Corporate taxpayers

1) Domestic corporations are taxed at 32% 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 effective January 1, 2000. 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 to its home office are taxed at the rate of 15% (except those registered with PEZA). Dividends declared by a domestic corporation to its foreign parent are generally taxed at 32%. 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.

5) A minimum corporate income tax of 2% of the gross income as of the end of the taxable year is imposed on a corporation which is subject to normal income tax of 32% beginning on the fourth taxable year immediately following the year in which such corporation was registered with the Bureau of Internal Revenue, when the minimum income tax is greater than the normal income tax for the taxable year.

Any excess of the minimum corporate income tax over the normal income tax as computed shall be carried forward and credited against the normal income tax for the three immediately succeeding taxable years.

6) Every corporation formed or availed for the purpose of avoiding the 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, is taxed at the rate of 10% for each taxable year on the improperly accumulated taxable income.

7) In general, an employer (individual or corporation) shall pay a final tax 32% on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file) unless the fringe benefit is required by nature of, or necessary to the trade, business or profession of the employer.

2) What business taxes are we subject to?

Both the national government and the local government impose business taxes. The rates vary depending on the type of business.

A) National tax

Value added tax (VAT)

1) Ten percent (10%) VAT is imposed on importation of goods and sale, barter, exchange or lease of goods, properties and services in the Philippines, subject to certain exceptions. Goods or properties mean all tangible and intangible objects, including real property, patents, trademarks and similar rights and movable and personal goods. Services cover performance of all kinds of services in the Philippines for a fee

Exports are generally subject to 0% VAT. VAT exempt goods include such items as books, fertilizers, livestock and poultry feeds and agricultural and marine food products in their original state.

2) Gross receipts tax on certain businesses:

a. Bank and other non-bank financial intermediaries - 0% to 5%

b. Life insurance companies - 5%

c. Common passenger carriers - 3%

d. Electric, gas and water utilities - 2%

e. Others - ranging from 3% to 30%

Note: Effective January 1, 2000 banks and other non-bank financial tax.

3) Excise tax on alcohol, tobacco, petroleum and mineral products, cinematographic films, automobiles, jewelry, etc. at varying rates.

B) Local tax on certain businesses

1) Manufacturers, wholesalers, exporters and contractors are subject to graduated taxes on certain amounts of sales/gross receipts and percentage taxes at maximum rates ranging from .375% to .75% on the amounts not subject to graduated taxes, depending on the place where business is conducted. For essential commodities, the rates are 50% lower. Retailers are subject to 2% tax if their gross receipts are P400,000 or less and to 1% tax if in excess of P400,000.

2) Banks and other financial institutions - percentage tax at maximum rates ranging from .50% to .75% depending on the locality of the business.

3) Others - varying rates

Aside from the above business taxes, there are other taxes levied in the
Philippines such as:

a. Real estate tax

b. Stamp tax on certain documents, instruments and related transactions such as issuance of shares of stock, evidence of indebtedness, transfer of real property, lease contracts, insurance policies, etc.

c. Community tax

d. Overseas communications tax

4) What are the advantages and disadvantages of a branch vis-à-vis a domestic subsidiary?

Advantages and disadvantages from legal and tax viewpoints of a branch compared to a domestic subsidiary are as follows:

(a) Branch offices are taxed only on their net income from sources in the Philippines while subsidiaries are taxed on their worldwide income. In both cases, however, a relief from double taxation may be granted subject to the provisions of applicable tax treaties. (Refer to the questions on taxes applicable to corporate taxpayers.)

(b) There are generally fewer formalities involved in opening a branch than incorporating a subsidiary.

(c) In terms of staffing, a subsidiary normally requires a complete set of corporate officers whereas a branch is able to operate with only a resident agent, who may also be the general manager, as its officer.

(d) Since a subsidiary has a separate juridical personality, a foreign parent company is protected from contractual and other liabilities incurred by its Philippine subsidiary; the liabilities of the branch office extend to that of its home office.

(e) A branch is allowed to claim, as deduction for income tax purposes, allocated head office expenses subject to certain requirements, while a subsidiary is not allowed to claim the same.

(f) Profit remittance by a branch registered with the PEZA is exempt from branch profit remittance tax while dividend remittance by a subsidiary is taxable.

5) What effect will a tax treaty with my country have on the tax rates?

A tax treaty is designed primarily to eliminate double taxation on foreign investors who otherwise have to pay taxes in the Philippines and in their home countries on the same income.

Please refer to Appendix IV for a list of tax treaties.