By Amor B. Pagulayan
"Taxation"
Discover Philippines, September - October 2004

There are two taxing authorities in the Philippines , namely the National Government and the Local Government Units (LGU's). The Local Government Units are the provinces, cities, municipalities and barangays or villages.

The National Government collects income tax, value added taxes, customs duties, excise taxes, documentary stamp taxes, percentage tax, estates and gifts taxes, etc. through the Commissioner of Internal Revenue and the Commissioner of Customs.

On the other hand, the Local Government Units impose and collect mayor's permits and license fees on businesses, real property taxes, annual professional taxes on practice of profession, amusement taxes, franchise tax, printer's tax, tax on quarrying, fixed tax on delivery trucks and vans, tax on transfer of real property taxes, community tax, and others.

INCOME TAX

a) Corporations (includes partnerships,etc.

Corporations are classified as domestic or foreign depending on the place of incorporation or organization. A domestic corporation is a corporation organized under Philippine laws. A foreign corporation is a corporation organized under the laws of a foreign country. A foreign corporation is either resident or non-resident.

Domestic and Resident Foreign Corporation, in general

The taxable income of a domestic corporation includes income earned from all sources (within and outside the Philippines ). A resident foreign corporation is one considered doing business in the Philippines (continuity of commercial dealings) and is taxed on net Philippine-source income .

The regular income tax rate is 32% of net taxable income. However, to deter corporations that consistently declare losses or pay very small income taxes, the law requires corporation to pay a 2% minimum corporate income tax ( MCIT ) on gross income on an annual basis, beginning its fourth year of operations, if the MCIT is greater than its regular corporate income tax liability.

Any excess of the MCIT over the regular income tax shall be carried forward and credited against the normal tax for the three immediately succeeding taxable years.

Non-Resident Foreign Corporation

As a general rule, non-resident foreign corporations are taxed at 32% of the gross amount of Philippine source income such as dividends, rents, royalties, compensation, and remuneration for technical services. This tax is withheld at source.

Corporations Improperly Accumulating Profits

A 10% income tax is imposed on the improperly accumulated profits of a corporation, except in the case of publicly held corporations, banks and other non-bank financial intermediaries and insurance companies.

When a corporation allows its profit to accumulate without justifiable needs, then the law presumes that it is avoiding tax on shareholders. Individual shareholders, depending on their status, pay 10%-25% tax on dividends received from corporations.

b) Individuals

For income tax purposes, individuals are classified and taxable as follows:

The rates of income tax on Citizens, Resident Aliens and Non-resident Aliens engaged in trade or business (in Philippine Pesos) are shown below:

There are special income tax rates on Passive Income earned by individuals, which are:

Withholding tax system:

Under the withholding tax system, the payer (referred to as the withholding agent) is required to deduct and withhold from the payee and to remit to the government the withholding tax. for Examples a payer paying professional fees is required to withhold 10%, fees to contractors at 1%, rentals on real property at 5%, etc. An employer is likewise required to withhold income tax from the salaries and wages of his employees.

Various Tax Treaties

The Philippines , in cooperation with other countries has entered into various tax treaties to avoid double taxation especially 100 in cases where the income is taxed twice: one by the country where the income is earned (country of source) and another by the country where the subject of taxation is either a citizen or resident (country of residence).

Another objective of tax treaties is to eliminate or minimize tax evasion through the adoption of the exchange of information scheme whereby signatory countries to the treaty undertake to furnish each other on a mutual basis information on the taxable income and or activities of their citizens and residents.

The Philippines has tax treaties with the following countries: to date- Australia, Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Hungary, Indonesia, India, Israel, Italy, Japan, Korea, Malaysia, The Netherlands, New Zealand, Norway, Pakistan, Romania, Russia, Singapore, Spain, Sweden, Thailand, United Kingdom, and the United States.

Value Added tax

A 10% value added tax is imposed on any person who, in the course of trade or business sells, barters, exchanges, leases goods or properties, renders services, or engages in similar transactions and who imports goods.

The valued added tax is based on the gross selling price or gross value in money of the goods or properties sold or bartered, etc. In case of imported goods, the value added tax is based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes (if any), and any other charges as may be due.

In computing the tax liability, the taxpayer subtracts from the tax due on sales the taxes on his purchase of raw materials. He thus pays only the difference between the tax on sales (output tax) and the tax on outlays for materials, supplies, services and capital goods (input tax).

If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over the succeeding quarters.

Export sales are zero-rated. Certain transactions are exempt from VAT, e.g. sale or importation of agricultural and marine food products, services subject to percentage taxes, interest income of banks and financial institutions, services rendered by regional headquarters of multinational companies, etc.

Percentage Taxes

Persons whose annual gross receipts do not exceed P 550,000 are exempt from payment of value added tax but shall pay a percentage tax equivalent to three (3%) of quarterly sales. Domestic carriers and keepers of garages shall pay 3% of their quarterly gross receipts. A 10% tax on overseas communications is imposed. A premium tax is imposed on any person doing insurance business equivalent to 5% of the total premiums collected. A percentage tax ranging from 1% to 5% on gross receipts (such as interests, commissions, discount, etc.) of banks, non-bank financial intermediaries and finance companies is imposed.

International air carriers and shipping carriers doing business in the Philippines shall pay 3% of their gross quarterly receipts. Electric, gas and water utilities are subject to 2% franchise tax on their gross receipts. Radio and television broadcasting companies, as a rule pay a franchise tax of 3% of their gross receipts, although they have options to register as a value added taxpayer.

Excise taxes

Excise tax is imposed on certain specified goods manufactured or produced for consumption in the Philippines for domestic sale or consumption or for any other disposition and those imported. Excise tax is paid in addition to VAT.

Alcohol products, tobacco products, petroleum products, mineral products, automobiles, and certain luxury items such as jewelry, precious metals, perfumes and toilet waters, yachts and other vessels intended for pleasure or sports are all subject to excise taxes.

The liability to pay excise tax accrues immediately upon removal of the goods from place of production or manufacture.

Documentary Stamp Tax

It is a tax imposed upon documents, instruments, loan agreements, sales and transfers of obligations, right or property incident thereto.

Some transactions subject to documentary stamp tax are listed below:

Customs Duties

Customs duties are taxes on imports or exports. Importation begins from the time the carrying vessel or aircraft enters Philippine territorial jurisdiction with the intention to unload therein to the time the goods are released or withdrawn from the customhouse upon payment of the customs duties or with legal permit to withdraw.

Estate taxes

Estate tax is a tax on the right of transmitting property at the time of death and on the privilege that a person is given in controlling to a certain extent the disposition of his property to take effect upon death.

Real and personal, tangible or intangible property wherever located in the case of citizens and resident aliens , and only such property as are situated in the Philippines in the case of non-resident aliens , that are transmissible upon death are subject to estate tax.

Allowable deductions from Gross Estate include funeral, medical and judicial expenses, losses, indebtedness, taxes and vanishing deductions (if applicable). The estate tax is based on the value of the net estate (in Philippine Peso) and computed in accordance with the following schedule.

Gift Taxes

Any transfer of property by gift or donation and or sale of property for less than an adequate and full consideration in money or in money's worth is subject to the gift or donor's tax.

Citizens, resident aliens and domestic corporations are subject to the tax regardless of where the gift was made or where the property donated is located, but they would be entitled to a tax credit equivalent to the amount of donor's taxes paid to and imposed by the foreign country where the gift was made. Non-resident aliens and foreign corporation would be subject to the tax only on their donations of property located in the Philippines .

Certain donations are exempted such as donations not exceeding P100,000, donation prompter nuptias not exceeding P10,000, gifts made to or for the use of the Philippine Government, gifts in favor of non-stock, non-profit educational, charitable, religious, research, accredited non-governmental organization, trust or philanthropic institutions provided not more than 30% thereof shall be used for administration purposes.

The donor's tax for each calendar year shall be computed on the basis of the total net gifts (in Philippine pesos) made during that calendar year with the following schedule:

The Donor's tax is increased to 30% of the net gifts if the donee is a stranger. A stranger is one who is not the brother, sister (whole or half-blood) spouse, ancestor, and lineal descendant or a relative by consanguinity in the collateral line within the fourth degree of relationship.

Local Taxes

Under the Constitution, each local government unit (provinces, cities, municipalities and barangays) shall have the power to create its own sources of revenue and to levy taxes, fees and charges subject to the guidelines and limitations provided by law. This power is exercised through the enactment of an appropriate tax ordinance.

Provinces impose a tax, not exceeding one-half of one percent (1/2 of 1%) of the total consideration or the fair market value on the transfer of ownership of real property, tax on sand and gravel (10% of market value), franchise tax (1/2 of 1% of gross annual receipts), tax on the business of printing (1/2 of 1% of gross annual receipts), professional tax on individuals, etc.

Municipalities may impose business taxes such as a minimum fixed annual tax to a maximum of 50% of 1% of their gross receipts of preceding calendar years (wholesalers, dealers, distributors, contractors, banks, stock market dealers and brokers); 1% or 2% of gross receipts of retailers, 37.5% of 1% of gross receipts of manufacturers, assemblers, repackers and processors, etc.

Individuals, domestic or foreign corporations pay community taxes (also called residence tax). Community tax certificates are needed whenever a person acknowledges any document before a notary public, receives any license, certificate or permit, etc. Individuals and corporations pay community tax certificates based on their gross income and value of real property owned, but in no case shall it exceed P 5,000 for individual and P 10,000 for corporations.

Municipalities within Metro Manila may levy taxes at rates not exceeding 50% of the maximum imposable. Cities are authorized to impose taxes, fees, etc that provinces and municipalities may levy, at rates that may be above the maximum established but not exceeding 50% of such maximum rates except professional and amusement taxes.

Barangays charge 1% tax on gross receipts of small retailers (gross receipts not exceeding P50,000 annually for cities and P 30,000 for municipalities), reasonable fees on billboards, outdoor advertisements, cockfights and cockpits and on places of recreation.

An investor must check the existing local tax ordinances of the local government unit wherein he intends to locate his business to be able to calculate the financial impact of these taxes on his operations.

Real Property Taxes

Real property tax is a tax imposed on real property, such as land, buildings, machinery and other improvements. Machinery embraces machines, equipment, mechanical contrivances, instruments, appliances or apparatus which may or may not be attached, permanently or temporarily to the real property.

Real property tax may consist of a) Annual Ad Valorem Tax; b) Additional 1% tax for Special Education Fund; c) Additional 5% tax on idle lands; and d) Special levy or assessment on property especially benefited by certain infrastructure developments.