Philippine tax laws call for the imposition of the following essential taxes: (i) income tax; (ii) estate and donor’s tax; (iii) value-added tax; (iv) excise tax; and (v) documentary stamp tax.
Income taxes are imposable on individuals and corporations. Individuals are classified as citizens or residents, while corporations include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does not include general professional partnerships (which are exempt from taxation) and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government.
Resident Citizens and Resident Aliens. Resident citizens and resident aliens are taxable on net income from all sources at graduated rates ranging from 5% to 32%.
Non-Resident Aliens Engaged in Trade or Business. Non-resident aliens engaged in trade or business in the Philippines are taxable on net income from all sources within the Philippines at graduated rates ranging from 5% to 32%. A non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a “non-resident alien doing business in the Philippines”.
Non-Resident Aliens Not Engaged in Trade or Business. Non-resident aliens not engaged in trade or business in the Philippines are taxable on gross income from all sources within the Philippines at the rate of 25%, withheld at source.
Reduced Rate for Certain Employed Aliens. Subject to certain conditions, aliens employed by Regional or Area Headquarters and Regional Operating Headquarters of multinational companies, by offshore banking units, and by foreign service contractors or foreign service subcontractors engaged in petroleum operations in the Philippines, shall be subject to 15% tax on their gross compensation income.
Domestic Corporations. Domestic corporations, including subsidiaries of foreign companies, are generally subject to income tax of 30% upon the net taxable income derived during each taxable year from all sources within and without the Philippines.
Resident Foreign Corporations. Resident foreign corporations, including Philippines branches of foreign companies, are generally subject to income tax of 30% upon the net taxable income derived during each taxable year from all sources within the Philippines. A foreign corporation is considered a resident when it is engaged in trade or business in the Philippines, having been duly issued a license therefor by the Securities and Exchange Commission.
Non-Resident Foreign Corporations. Non-resident foreign corporations are generally subject to income tax of 30% upon the gross income derived during each taxable year from all sources within the Philippines.
Minimum Corporate Income Tax. A Minimum Corporate Income Tax (“MCIT”) of 2% is imposed on the gross income of domestic and resident foreign corporations, which amount shall be due in lieu of the regular corporate income tax if the latter is less than the MCIT, or if the corporation has zero or negative taxable income. The MCIT is imposable beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations.
Reduced Rates for Certain Corporations. Subject to certain conditions: (i) proprietary educational institutions and hospitals which are non-profit shall pay a tax of 10% on their taxable income; (ii) international carriers doing business in the Philippines shall pay a tax of 2.5% on its “Gross Philippine Billings”; (iii) income derived by offshore banking units authorized by the Bangko Sentral ng Pilipinas (Central Bank of the Philippines) to transact business with offshore banking units, including any interest income derived from foreign currency loans granted to residents, shall be subject to a final income tax at the rate of 10% of such income; (iv) regional or area headquarters of multinational companies shall not be subject to income tax, while regional operating headquarters shall pay a tax of 10% of their taxable income; (v) cinematographic film owners, lessors, or distributors shall pay a tax of 25% of its gross income from all sources within the Philippines; (vi) non-resident owners or lessors of vessels shall be subject to a tax of 4.5% of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations; and (vii) rentals, charters and other fees derived by non-resident lessors of aircraft, machineries and other equipment shall be subject to a tax of 7.5% of gross rentals or fees.
Estate and Donor’s Tax
Estate Tax. An estate tax at graduated rates ranging from 0% to 20% is levied, assessed, collected and paid upon the transfer of the net estate of every decedent, whether resident or non-resident of the Philippines. Subject to a reasonable extension not to exceed thirty (30) days, the estate tax return shall be filed within six (6) months from the death of the decedent.
Donor’s Tax. A donor’s tax, either at graduated rates ranging from 0% to 15% or at a fixed rate of 30%, is generally levied, assessed, collected and paid upon the transfer by any person, resident or non-resident, of property by gift.
A 12% value-added tax (“VAT”) on the sale of goods and services based on gross selling price or gross value in money of the goods or properties covered, or gross receipts in case of leases, is generally imposed on all sales, barters, exchanges, leases of goods or properties, and services in the Philippines, as well as on importations of goods.
Subject to certain limitations, input taxes on purchase and importation of goods, and purchase of services, are allowed to be credited against the VAT output tax liability.
In certain instances, sales by VAT-registered persons may be subject to 0% rate, where input tax credits may still be claimed. An application may then be filed with the Bureau of Internal Revenue for the issuance of tax credit certificates or refund of creditable input tax due or paid attributable to such sales or services. This generally applies to export sales or activities related thereto.
The law also enumerates certain VAT-exempt activities or transactions. Unlike in the case of zero-rated transactions, input tax credits cannot be claimed for VAT-exempt transactions.
A person becomes subject to VAT when his annual gross sales or receipts exceed One Million Five Hundred Thousand Philippine Pesos (P1,500,000.00) or when he elects to be subjected to VAT even if sales fall below the said threshold level. Where his gross sales or receipts fall below the said amount, and the taxpayer is not a VAT-registered person, he shall pay a percentage tax of 3% of his gross quarterly sales or receipts.
Documentary Stamp Tax
Documentary stamp taxes are due and to be affixed on certain documents, instruments or evidence of business transactions. Any instrument, document or paper which is required by law to be stamped and which has been signed, issued, accepted or transferred without being duly stamped, shall not be recorded and shall not be admissible in evidence in any court until the requisite stamp or stamps are affixed and cancelled.
Other Impositions by the National Government
In addition to the value-added tax and applicable taxes, importations are generally subject to custom duties, which is collectible by the Philippine Bureau of Customs. Under special circumstances, Philippine laws also provide for the imposition of anti-dumping duty, countervailing duty, marking duty, and discriminating duty.
Local taxes imposable by the local government units include annual business or license fees, annual real property taxes, and transfer taxes due on each transfer of real property.
Tax-Free Transfers of Property
Subject to certain conditions, a transaction involving the transfer of real property may qualify as a “tax-free exchange”. In such a case, the transfer would be subject to tax on a “deferred” basis on the gain, and the tax normally due and imposable by the national government on such transfers (either 6% capital gains tax, or 7.5% creditable withholding tax plus 30% income tax on the actual gain at yearend) would be deferred until such time that the property is subsequently transferred for value.
There are variations for this type of transaction, which may call for the imposition of VAT on the transfer, depending on how the asset involved is classified.