Tax reforms are underway in the Philippines.
The Tax Reform for Acceleration and Inclusion (TRAIN) law has, since January this year, jacked up or introduced excise taxes on fuels, cigarettes, sugary drinks, automotive vehicles, and other goods. Tax revenues collected on these were to offset a fall in personal income tax revenue - the restructured tax regime for individuals sees a higher tax-exempt annual salary cap of 250,000 Philippine pesos (S$6,500).
The government expects TRAIN to add around 90 billion Philippine pesos to its tax takings, and said that tax takings have already started to rise, climbing 19 per cent in the first five months of 2018.
Hikes in fuel prices have prompted calls for the TRAIN law to be suspended, but the Duterte administration has said that such a suspension would have a minimal and short-term impact on inflation, and could stifle growth. The government says tax revenues are much needed to support its ambitious “Build, Build, Build Program”, aimed at bridging the infrastructure gap between the Philippines and its Asean neighbours.
Here are the key tax rates:
Corporate Tax: 30% standard rate
Local and foreign businesses are both subject to a standard corporate tax rate of 30 per cent. Domestic ones - those incorporated in the Philippines - are taxed on their worldwide net taxable income, while foreign corporations are subject to tax only on income from Philippine sources. So foreign corporations doing business in the Philippines through a branch office are considered non-resident and therefore only taxed on revenue sourced from the Phlippines.
Minimum corporate income tax: 2% on gross income
From the fourth taxable year after the start of business operations, a company would have to pay at least 2 per cent of the company’s income as tax. This means that all domestic companies in the Philippines would have to pay either 30 per cent corporate income tax, or 2 per cent minimum corporate income tax.
Concessionary rates and exemptions
Proprietary educational institutions and non-profit hospitals face a lower corporate income tax rate of 10 per cent. This applies if not more than 50 per cent of their total gross income is derived from unrelated trade, business and other activities.
Non-profit organisations and non-stock, non-profit educational institutions (where all assets and revenues are used directly and only for educational purposes), are exempt from tax.
Indirect Tax: 12% VAT
The Philippines imposes a value added tax (VAT) of 12 per cent on most sales of goods and services.
Export sales are zero-rated, while the sales of certain services are exempt from VAT. For those not VAT-registered, because their annual sales are less than 3 million Philippine pesos, a 3 per cent tax applies.
The TRAIN reforms included changes to the detailed conditions under which VAT applies, while providing for additional VAT exemptions, such as on the sale of goods and services to senior citizens and those with disabilities, as well as on drugs and medicines for diabetes, high cholesterol and hypertension.
Dividends: Dividends distributed to a non-resident are taxed at 15 per cent if the country of the foreign corporate recipient allows a tax credit of 15 per cent. If not, dividends are subject to a withholding tax of 30 per cent
Interest: Interest paid to a non-resident is subject to a 20 per cent withholding tax
Royalties: Royalty payments made to a non-resident are subject to a 20 per cent withholding tax.
Personal Tax: 35% top marginal rate
The Philippines taxes personal income at a series of progressive rates ranging from 5 per cent to 35 per cent.
Resident citizens are taxed on worldwide income, while resident foreigners and non-residents are taxed only on Philippine-source income. Foreign individuals may also benefit from preferential tax treatment.
What’s taxable: all income less deductions. This includes compensation, business income, capital gains from the sale of real property or shares, dividends, interest, rents, royalties, annuities, pensions and share of income from general professional partnerships.
Exemptions and other taxes
Minimum wage earners need not pay income tax on their compensation income. Their holiday, overtime, night shift and hazard pay is also tax-exempt.
On the sale of real property, individuals are subject to a 6 per cent capital gains tax on the gross sales price or the current fair market value, whichever is higher. For capital gains derived from the sale of shares not traded on the stock exchange, individuals will also be taxed at a rate of 15 per cent. Gains from the sale of shares listed on the stock exchange are taxed at 0.6 per cent of the gross sales price.
To incentivise particular economic activities and investments, the government provides businesses with incentives under the Omnibus Investment Code of 1987 and the Special Economic Zone Act of 1995. There are both fiscal incentives, such as income tax holidays, and non-fiscal ones such as the simpler customs procedures for imports and exports. There are also other incentives unique to enterprises engaged in specific business activities.
Need more information?
Official: Bureau of Internal Revenue
Deloitte: Philippines Tax Highlights 2019
KPMG: Philippines Tax Profile (Updated May 2015)
Here are our other TAX GUIDES: