Personal taxation in Manila
Effective personal income tax rate
Teleport city rankings for personal income tax
Resident citizens are taxed on worldwide income; resident aliens and nonresidents pay tax only on Philippine-source income. Foreign individuals can avail themselves of preferential tax treatment or may be exempt from income tax under applicable tax treaties, subject to a confirmation ruling from the BIR.
A citizen normally is considered a resident unless he/she meets the requirements to be deemed a nonresident. The residence of a foreign worker is generally established when the aggregate length of stay in any calendar year exceeds 180 days.
Married couples in the Philippines who do not derive income only from compensation must file a joint income tax return.
Individual income tax is charged at progressive rates ranging from 5% to 32%. Individuals occupying managerial and highly technical positions employed by RHQs, ROHQs, multinational
Deductions and allowances
Subject to certain restrictions, deductions are granted for premium payments on health and/or hospitalization insurance. Personal allowances are available to the taxpayer and his/her spouse, and for qualified dependent children.
Taxable personal income is all income, less allowable deductions and personal exemptions. It includes compensation, business income, capital gains (arising from the sale of real property and share transactions), dividends, interest, rents, royalties, annuities, pensions, and a partner’s distributive share of the net income of general professional partnerships.
Capital gains generally are subject to the ordinary income tax rates, although gains from the sale of certain shares and real property are subject to tax specified rates.
Other taxes on individuals
Real property tax
A property tax is imposed on real property at a rate that depends on the property’s location. The tax should not exceed 3% of the assessed value per the tax declaration.
Tax is imposed on the net estate of both residents and nonresidents, at rates ranging from 5% to 20%.
An employee is required to pay monthly contributions (ranging from PHP 36.30 to PHP 581.30) to the social security system based on his/her salary bracket. The employer also makes a contribution.
Compliance for individuals
Late payments are subject to a penalty equal to 25% of the amount due. Annual interest of 20% is assessed on the unpaid amount from the due date until fully paid. A compromise penalty will be based on the tax due exclusive of the 25% surcharge and 20% interest.
Filing and payment
Tax returns are due on or before 15 April after the close of the tax year. Tax on compensation income is withheld monthly by the employer.
Corporate taxation in Manila
Teleport city rankings for corporate income tax
Philippine corporations are taxed on worldwide income; nonresident companies are taxed only on Philippine-source income. A foreign corporation with a branch in the Philippines is taxed on Philippine-source income.
Taxation of dividends
Dividends received by Philippine and resident foreign companies from a domestic corporation are not subject to tax.
A corporation is resident if it is incorporated in the Philippines or, if incorporated outside the Philippines, it has a branch in the Philippines.
Losses may be carried forward for three years unless the taxpayer benefits from a tax incentive or an exemption. Losses may
Incentives are provided under the Omnibus Investment Code of 1987 (administered by the Board of Investment) and the Special Economic Zone Act of 1995. Benefits usually include tax (e.g. income tax holidays) and nontax incentives (e.g. simplification of customs procedures for imports and exports). Enterprises engaged in specified business activities may be entitled to other incentives.
Philippine corporations are taxed at a rate of 30%. The rate for regional operating headquarters is 10%.
Alternative minimum tax
A minimum corporate income tax (MCIT) equal to 2% of gross income is imposed on both domestic and resident foreign corporations beginning in the fourth taxable year of operations. The MCIT is imposed in each quarter of the taxable year when a company has no or negative taxable income, or when the amount of the MCIT is greater than the corporation’s normal income tax liability. Any excess of MCIT over the normal income tax may be carried forward and credited against the normal income tax for the following three taxable years.
A 10% surtax is imposed on improperly accumulated earnings.
Foreign tax credit
Foreign tax paid by a domestic corporation may be credited proportionately against Philippine tax on the same profits, but the credit is limited to the amount of Philippine tax payable on the foreign income.
Corporate tax is imposed on a company’s profits, which generally consist of business/trading income. Normal business expenses may be deducted in computing taxable income.
Capital gains generally are taxed as income. However, gains on the sale of shares not traded on the stock exchange are subject to 5% withholding tax on the first PHP 100,000, and 10% thereafter. Gains on the sale of shares listed and traded on the stock exchange are taxed at 0.5% of the gross selling price. Gains derived from the sale of real property not used in a business are subject to 6% final withholding tax based on the sales price or fair market value, whichever is higher.
Other taxes on corporations
Real property tax
A property tax is imposed on real property at a rate that depends on the location of the property. The tax should not exceed 3% of the assessed value per the tax declaration.
The employer must make a monthly contribution to the social security system corresponding to the salary of covered employees. The maximum monthly contribution for an employer for an employee in the highest salary bracket is PHP 1,208.70.
A percentage tax of 3% to 7% is imposed on certain types of businesses, such as banks, finance companies, insurance companies, and common carriers, except domestic carriers that transport passengers by air, which are subject to VAT.
Gratuitous transfers of property are subject to a donor’s tax at graduated rates ranging from 2% to 15% or 30% of the fair market value of the property at the time of the donation.
Various rates of duty apply, depending on the type of document.
Compliance for corporations
Consolidated returns are not permitted; each company must file a separate return.
Late payments are subject to a penalty equal to 25% of the amount due. Annual interest of 20% is assessed on the unpaid amount from the due date until fully paid. A compromise penalty will be based on the tax due, exclusive of the 25% surcharge and 20% interest.
The tax authorities will issue an advance ruling on the tax consequences of a contemplated transaction at the request of a taxpayer.
A calendar year or fiscal year (an accounting period of 12 months ending on the last day of any month other than December) may be used.
The tax return must be filed, with or without payment, on or before the 15th day of the fourth month following the close of the taxpayer's taxable year.
Other taxation in Manila
Value added tax
Filing and payment
The return/declaration may be filed either manually or through EFPS, no later than the 20th day following the close of the month (for monthly returns) and no later than the 25th day following the close of each taxable quarter (for quarterly returns).
The sale and importation of certain goods and services are subject to a 12% VAT. Certain sales are zero-rated.
VAT is imposed on most sales of goods and services.
The registration threshold for VAT purposes is PHP 1,919,500.
The transfer pricing rules, which are based on the OECD guidelines, apply to both domestic and international related party transactions. The following transfer pricing methods are permitted: comparable uncontrolled price method, resale price method, cost-plus method, profit split method, residual profit split approach and transactional net margin method.
Foreign exchange control
Foreign currency may be bought and sold freely by residents (including foreign corporations operating in the Philippines) and may be brought into or sent out of the country with minimal restrictions. Nonresidents also may hold foreign currency.
Accounting principles/financial statements
IAS/IFRS. Financial statements must be prepared annually and audited by an independent CPA.
Principal business entities
These are corporation (stock/nonstock), partnership, sole proprietorship, regional headquarters (RHQ), regional operating headquarters (ROHQ), representative office and branch of a foreign company.
Royalty payments made to a nonresident are subject to 30% withholding tax, unless the rate is reduced under a tax treaty, subject to a confirmation ruling from the BIR. A 20% final withholding tax is levied on royalty payments made to a domestic or resident foreign corporation.
Dividends distributed by a Philippine company to a nonresident are taxed at a rate of 15%, provided the country of the nonresident foreign corporation allows a tax credit of 15%. Otherwise, the dividends are taxed at 30%. The withholding tax may be reduced under an applicable tax treaty, subject to a confirmation ruling from the Bureau of Internal Revenue (BIR).
Branch remittance tax
A 15% branch profits tax is levied on the after-tax profits remitted by a branch to its head office.
Other payments to nonresidents may be subject to final tax (e.g. management fees at 30%; certain payments related to vessels at 4.5%, or aircraft, machinery and other equipment at 7.5%). Rates may be reduced under a tax treaty, subject to a confirmation ruling from the BIR.
Interest paid to a nonresident is subject to 20% withholding tax, unless the rate is reduced under a tax treaty, subject to a confirmation ruling from the BIR.
Technical service fees
Technical service fees, which may be treated as royalties in some cases, are subject to a 30% withholding tax, unless the rate is reduced under a tax treaty, subject to a confirmation ruling from the BIR. (Fees treated as royalties are also subject to withholding VAT of 12%, unless specifically exempt under the law.)
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