Chapter 6 - Tax Issues
The Philippine tax system is a combination of the global and schedular systems of taxation. Domestic and resident taxpayers are taxed on a worldwide income. Non-resident taxpayers are taxed on Philippine-source income. While a corporation is levied at a flat rate, individuals are taxed at progressive rates.
The local government units (LGUS) are empowered to impose local taxes and grant tax exemptions and incentives for business activities within their areas of jurisdiction.
The principal taxes levied include: taxes on income and gains; taxes on transactions; and taxes on property.
Taxes on income and gains include income tax and capital gains tax on sale of shares of stocks and real property.
Taxes on transactions include value-added tax (VAT), excise tax, percentage tax on business not subject to VAT, tariff and customs duties, and estate and donor's taxes.
Taxes on property include real property tax and community tax.
Classes of Taxpayers
Income taxpayers are classified as: corporations, individuals and fiduciaries.
Corporations include domestic corporations, resident foreign-corporations, and non-resident foreign corporations deriving income from sources within the Philippines.
Individuals include citizens of the Philippines (resident and non-resident) and aliens (resident, non-resident engaged in trade or business in the Philippines, and non-resident not engaged in trade or business but deriving income from sources within the Philippines)
Fiduciaries include estates and trusts.
Domestic corporations are taxed on a worldwide income, while resident foreign corporations are generally taxed in the same manner as domestic corporations at the rate of 35% of net income. Foreign corporations not engaged in business or trade in the Philippines but who derived their income sources in the Philippines are taxed a flat rate of thirty five percent (35%) also. Further interest income on foreign loans earned is subject to a twenty percent (20%) tax.
Foreign international carriers are taxed at the rate of two-and-a-half percent (2.5%) on their gross Philippine billings. Non-resident foreign cinematographic film owners, lessors or distributors are taxed at the rate of twenty percent (20%) tax. Foreign mutual life insurance companies are taxed at the rate of ten percent (10%) of their gross investment income derived from sources within the Philippines.
Foreign Corporations include branch offices or local subsidiaries of foreign companies.
Effective January 1, 1999, the effective tax rate was set at 33% and 32 % effective 2000. The extent to which a non-resident corporation is liable to Philippine tax may depend on whether or not the country of which the foreign corporation has a tax treaty with the Philippines.
Individual resident foreigners who derive their income from all sources in the Philippines and in foreign countries taxed from 1-35% on gross compensation income (arising from an employer-employee relationship); and net on non-compensation (business and other) income are taxed accordingly: twenty percent (20%) on royalties, prizes, winnings, twenty percent (20%) on interest on bank deposit and on substitute arrangements, five percent (5%) capital gains tax on sale of realty.
A foreign corporation with a branch in the Philippines is taxed on its net income from Philippine sources. It is also subject to capital gains tax on the sale of shares of stocks. Other income such as interest, royalties and dividends are taxed at various rates.
A branch remittance tax of 15% is imposed on profit actually remitted by the branch to its head office abroad. Interests, dividends, rents, royalties, capital gains, technical service fees, premiums annuities, emoluments, and other fixed or determinable income are not considered s branch profits unless such income items are effectively connected with the conduct of the firm's business in the Philippines.
A Philippine subsidiary is subject to income tax on worldwide income.
Taxable income of a partnership (except general professional partnership) is computed in the same manner as in a corporation. Partners' shares in taxable partnerships profits are treated like dividends.
A joint venture formed for the purpose of undertaking construction projects or engaging in energy operations under a service contract with the government is not subject to income tax. However, the parties to the joint venture in their individual capacity as natural or juridical persons are subject to income tax. Other joint venture companies are taxed similarly to ordinary domestic corporations.