Taxation in the Philippines

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I.                   Introduction to the tax systemThe laws governing taxation in the Philippines are contained within the National Internal Revenue Code.  This code underwent substantial revision with passage of the Tax Reform Act of 1997.  This law took effect on January 1, 1998.Taxation is  administered  through the Bureau of Internal Revenue which comes under the Department of Finance.  The chief executive of the Bureau of Internal Revenue is the          Commissioner who has exclusive and original jurisdiction to interpret the provisions of the code and other tax laws.  The commissioner also has the powers to decide disputed assessments, grant refunds of taxes, fees and other charges and penalties, modify payment of any internal revenue tax and abate or cancel a tax liability.  Taxpayers can appeal decisions by the Commissioner directly to the Court of Tax Appeals.II.                Primary tax incentivesA.     Tax holidayThe Omnibus Investments Code grants to enterprises that have registered with the Board of Investments and that qualify under the annual Investments Priority Plan  entitlements to tax holidays of either four or six years.  In addition, they are granted tax credits for purchase of Philippine-made capital equipment and raw materials.B.     Special Economic ZonesThere are over thirty special economic zones throughout the Philippines where export manufacturing firms are encouraged to start operations.  Under the Philippine Export Zone Authority Law, a special economic zone registered enterprise can, in lieu of all other national and local taxes, pay a tax of 5% of its gross income.A firm that has registered under the Omnibus Investments Code that is located and registered to do business within a special economic zone can have a tax holiday for the first four or six years of its operations, followed by  a 5% tax thereafter.  The exemption from national taxes covers all internal revenue taxes, including the Value Added Tax.III.             Tax treaty with the United StatesThe Philippines has tax treaties with many countries, including the United States, in order to minimize the effects of double taxation.  The business profits of a resident of another country with whom the Philippines has a tax treaty  are taxable in the Philippines only if the resident has a permanent establishment in the Philippines to which the profits are attributable.IV.              Primary types of taxationA.     Individual Income TaxResidents engaged in trade or business are taxed upon their net income (gross income less allowable deductions and personal exemptions) according to a schedule of rates ranging from 3% to 33%.  The maximum rate will be reduced to 32% on January 1, 2000.  Residency tests are used to determine resident alien status where the resident alien falls under the Individual Income Tax schedule of rates.B.     Passive income1.      Interest A ‘final’ tax of 20% is imposed on interest income.  This tax is withheld at the source.  Exceptions to this are:i.                    Interest income from a depositary bank with a Foreign Currency Deposit Unit is subject to a final tax rate of 7.5%.ii.                  Philippine long term investments of over five years are exempt from tax.2.      DividendsA final tax of 10% is imposed on cash or property dividends from domestic corporations, joint stock companies, insurance or mutual funds, or regional operating headquarters of multinational corporations.The distributable net income, after tax, of a partnership is subject to the same final tax as dividends.3.      Capital gainsThe tax code imposes a final tax of 5% on net capital gains from the sale of stock in a domestic corporation up to 100,000 pesos.  The tax is 10% for any income over 100,000 pesos.  If the stock is stock exchange listed, a transfer tax of 0.5% is also imposed.4.      Fringe benefitsFringe benefits, such as housing, expense accounts, vehicles, household personnel, membership fees and educational fees are...
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