International Tax

Philippines Highlights 2017

Investment basics: OSD, it is irrevocable for the taxable year for which the
return is filed.
Currency – Philippine Peso (PHP)
Taxation of dividends – Dividends received by
Foreign exchange control – Foreign currency may be
Philippine and resident foreign companies from a
bought and sold freely by residents (including foreign
domestic corporation are not subject to tax.
corporations operating in the Philippines) and may be
brought into or sent out of the country with minimal Capital gains – Capital gains generally are taxed as
restrictions. Nonresidents also may hold foreign currency. income. However, gains on the sale of shares not traded
on the stock exchange are subject to 5% withholding tax
Accounting principles/financial statements –
on the first PHP 100,000, and 10% thereafter. Gains on
IAS/IFRS. Financial statements must be prepared
the sale of shares listed and traded on the stock
annually and must be audited by an independent CPA.
exchange are taxed at 0.5% of the gross selling price.
Principal business entities – These are corporation Gains derived from the sale of real property not used in a
(stock/nonstock), partnership, sole proprietorship, business are subject to 6% final withholding tax based on
regional headquarters (RHQ), regional operating the sale price or fair market value, whichever is higher.
headquarters (ROHQ), representative office and branch of
Losses – Losses may be carried forward for three years
a foreign company.
unless the taxpayer benefits from a tax incentive or an
Corporate taxation: exemption. Losses may not be carried forward where the
business undergoes a substantial change in ownership.
Residence – A corporation is resident if it is incorporated
The carryback of losses is not permitted.
in the Philippines or, if incorporated outside the
Philippines, it has a branch in the Philippines. Rate – Philippine corporations are taxed at a rate of
30%. The rate for regional operating headquarters is
Basis – Philippine corporations are taxed on worldwide
10%.
income; nonresident companies are taxed only on
Philippine-source income. A foreign corporation with a Surtax – A 10% surtax is imposed on improperly
branch in the Philippines is taxed on Philippine-source accumulated earnings.
income. Alternative minimum tax – A minimum corporate
Taxable income – Corporate tax is imposed on a income tax (MCIT) equal to 2% of gross income is
company’s profits, which generally consist of imposed on both domestic and resident foreign
business/trading income. Normal business expenses may corporations beginning in the fourth taxable year of
be deducted in computing taxable income. operations. The MCIT is imposed in each quarter of the
taxable year when a company has no or negative taxable
In lieu of itemized deductions, a domestic and resident
income, or when the amount of the MCIT is greater than
corporation may elect to use the optional standard
the corporation’s normal income tax liability. Any MCIT
deduction (OSD), which may not exceed 40% of total
that exceeds the normal income tax may be carried
gross income, in computing taxable income for the
taxable quarter/year. Once a decision is made to use the
Philippines Highlights 2017

forward and credited against the normal income tax for Other taxes on corporations:
the following three taxable years.
Capital duty – No
Foreign tax credit – Foreign tax paid by a domestic
Payroll tax – A corporate employer is required to
corporation may be credited proportionately against
withhold tax on the remuneration paid to its employees.
Philippine tax on the same profits, but the credit is limited
to the amount of Philippine tax payable on the foreign Real property tax – A property tax is imposed on real
income. property at a rate that depends on the location of the
property. The tax should not exceed 3% of the assessed
Participation exemption – No
value per the tax declaration.
Holding company regime – No
Social security – The employer must make a monthly
Incentives – Incentives are provided under the Omnibus contribution to the social security system corresponding
Investment Code of 1987 (administered by the Board of to the salary of covered employees. The maximum
Investment) and the Special Economic Zone Act of 1995. monthly employer contribution for an employee in the
Benefits usually include tax (e.g. income tax holidays) highest salary bracket is PHP 1,208.70.
and nontax incentives (e.g. simplification of customs
Stamp duty – Various rates of duty apply, depending on
procedures for imports and exports). Enterprises engaged
the type of transaction/document.
in specified business activities may be entitled to other
incentives. Transfer tax – Gratuitous transfers of property are
subject to a donor’s tax at graduated rates ranging from
Withholding tax: 2% to 15% or 30% of the fair market value of the
Dividends – Dividends distributed by a Philippine property at the time of the donation.
company to a nonresident are taxed at a rate of 15%, A local transfer tax on real property is levied at a rate of
provided the country of the foreign corporate recipient 0.5% of the gross sales price or fair market value of the
allows a tax credit of 15%; otherwise, the dividends are property, whichever is higher, on the transfer or sale of
taxed at a rate of 30%. The withholding tax may be real property.
reduced under an applicable tax treaty. Other – A percentage tax of 3% to 7% is imposed on
Interest – Interest paid to a nonresident is subject to a certain types of businesses, such as banks, finance
20% withholding tax, unless the rate is reduced under a companies, insurance companies and common carriers,
tax treaty, subject to a confirmation ruling from the except domestic carriers that transport passengers by air,
Bureau of Internal Revenue (BIR). which are subject to VAT.
Royalties – Royalty payments made to a nonresident are Anti-avoidance rules:
subject to a 30% withholding tax, unless the rate is
reduced under a tax treaty. A 20% final withholding tax is Transfer pricing – The transfer pricing rules, which are
levied on royalty payments made to a domestic or based on the OECD guidelines, apply to both domestic
resident foreign corporation. and cross-border related party transactions. The following
transfer pricing methods are permitted: comparable
Technical service fees – Technical service fees, which
uncontrolled price method, resale price method, cost-plus
may be treated as royalties in some cases, are subject to
method, profit split method, residual profit split approach
a 30% withholding tax, unless the rate is reduced under a
and transactional net margin method.
tax treaty. Fees treated as royalties also are subject to
withholding VAT of 12%, unless specifically exempt under Thin capitalization – No
the law. Controlled foreign companies – No
Branch remittance tax – A 15% branch profits tax is Disclosure requirements – No
levied on the after-tax profits remitted by a branch to its
Compliance for corporations:
head office.
Other – Other payments to nonresidents may be subject Tax year – A calendar year or fiscal year (an accounting
to final tax (e.g. management fees at 30%; certain period of 12 months ending on the last day of any month
payments related to vessels at 4.5%; and aircraft, other than December) may be used.
machinery and other equipment at 7.5%). Rates may be Consolidated returns – Consolidated returns are not
reduced under a tax treaty, subject to a confirmation permitted; each company must file a separate return.
ruling from the BIR.
Philippines Highlights 2017

Filing requirements – The tax return must be filed, with quarter/year. Once an election is made to use the OSD, it
or without payment, on or before the 15th day of the is irrevocable for the taxable year for which the return is
fourth month following the close of the taxpayer's taxable made.
year. Capital gains – Capital gains generally are subject to the
Penalties – Late payments are subject to a penalty equal ordinary income tax rates, although gains from the sale of
to 25% of the amount due. Annual interest of 20% is certain shares and real property are subject to specific
assessed on the unpaid amount from the due date until rates.
fully paid. A compromise penalty will be based on the tax Deductions and allowances – Subject to certain
due, exclusive of the 25% surcharge and 20% interest. restrictions, deductions are granted for premium
Rulings – The tax authorities will issue a ruling on the payments on health and/or hospitalization insurance.
tax consequences of a transaction at the request of a Personal allowances are available to the taxpayer and
taxpayer. his/her spouse, and for qualified dependent children.

Personal taxation: Rates – Individual income tax is charged at progressive

rates ranging from 5% to 32%. Individuals occupying
Basis – Resident citizens are taxed on worldwide income; managerial and highly technical positions employed by
resident aliens and nonresidents pay tax only on RHQs, ROHQs, multinational companies, offshore
Philippine-source income. Foreign individuals may benefit business units and petroleum service
from preferential tax treatment or may be exempt from contractors/subcontractors are taxed at a rate of 15% on
income tax under an applicable tax treaty, subject to a their gross income.
confirmation ruling from the BIR.
An individual is subject to capital gains tax on the sale of
Residence – A citizen normally is considered a resident real property at a rate of 6% of the gross sales price or
unless he/she meets the requirements to be deemed a current fair market value, whichever is higher. An
nonresident. The residence status of a foreign employee individual also is subject to capital gains tax on the sale
generally is established when the aggregate length of of shares not traded on the stock exchange at a rate of
stay in any calendar year exceeds 180 days. 5% of the net gain not exceeding PHP 100,000, and 10%
Filing status – Married couples in the Philippines who do on the excess. Gains derived from the sale of shares
not derive income only from compensation must file a listed and traded on the stock exchange are taxed at
joint income tax return. 0.5% of the gross sales price.
Taxable income – Taxable personal income is all Other taxes on individuals:
income, less allowable deductions and personal
exemptions. It includes compensation, business income, Capital duty – No
capital gains (arising from the sale of real property and Stamp duty – Various rates of duty apply, depending on
share transactions), dividends, interest, rents, royalties, the type of transaction/document.
annuities, pensions and a partner’s distributive share of Capital acquisitions tax – No
the net income of general professional partnerships.
Real property tax – A property tax is imposed on real
Minimum wage earners (MWEs) are exempt from the property at a rate that depends on the property’s
payment of income tax on their compensation income. location. The tax should not exceed 3% of the assessed
Holiday pay, overtime pay, night shift differential pay and value per the tax declaration.
hazard pay received by MWEs also are exempt. However,
Inheritance/estate tax – Tax is imposed on the net
an employee who receives/earns additional
estate of both residents and nonresidents, at rates
compensation, such as commissions, honoraria, fringe
ranging from 5% to 20%.
benefits, benefits in excess of the nontaxable ceiling of
PHP 82,000, taxable allowances and taxable income other Net wealth/net worth tax – No
than the exempt remuneration mentioned above, does Social security – An employee is required to make
not qualify as an MWE and, therefore, the individual’s monthly contributions (ranging from PHP 36.30 to PHP
earnings are not exempt from income tax. 581.30) to the social security system based on his/her
In lieu of itemized deductions, an individual engaged in salary bracket. The employer also makes a contribution.
business or the practice of a profession may elect to use Compliance for individuals:
the OSD, which may not exceed 40% of total gross
income (before deducting the cost of services/the cost of Tax year – Calendar year
goods sold), in computing taxable income for the taxable
Philippines Highlights 2017

Filing and payment – Tax returns are due on or before Registration – The registration threshold for VAT
15 April after the close of the tax year. Tax on purposes is PHP 1,919,500.
compensation income is withheld monthly by the Filing and payment – The return/declaration may be
employer. filed either manually or through EFPS, no later than the
Individuals receiving compensation income from only one 20th day following the close of the month (for monthly
employer during the taxable year may qualify for returns) and no later than the 25th day following the
substituted filing provided the amount of tax due equals close of each taxable quarter (for quarterly returns).
the amount of tax withheld by the employer at the end of Source of tax law: National Internal Revenue Code of
the taxable calendar year. The same requirements must 1997, as amended, and other regulations; Local
be met for married individuals to qualify for “substituted” Government Code of 1991; Tariff and Customs Code; and
filing. Supreme Court decisions
Penalties – Late payments are subject to a penalty equal Tax treaties: The Philippines has concluded
to 25% of the amount due. Annual interest of 20% is approximately 41 tax treaties.
assessed on the unpaid amount from the due date until
Tax authorities: Bureau of Internal Revenue (national
fully paid. A compromise penalty will be based on the tax
taxes); City/Municipal Treasurer’s Office (local taxes);
due exclusive of the 25% surcharge and 20% interest.
Bureau of Customs
Value added tax:

Taxable transactions – VAT is imposed on most sales of Contact:

goods and services. Walter Abela Jr. ([email protected])
Rates – The sale and importation of certain goods and
Senen Quizon ([email protected])
services are subject to a 12% VAT. Certain sales are
zero-rated.

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