Taxation in the Philippines

History

During the 17th and 18th centuries, the Governor-General led the central and local government in the Philippines. The financial system was managed by an Intendant General, with the Chief Royal Accountant (Contador de Resultas) assisting him. The Contador's decisions were final unless changed by the Council of the Indies. Tax collection was carried out by local officials: governadorcillos, alcaldes, and cabezas de barangay.

The first internal revenue law (Philippine Commission Act No. 1189) in the Philippines was modeled after the US system. It was approved on July 2, 1904 by the Philippine Commission, and became effective on August 4, 1904. Further laws were passed in 1913, 1916, and 1917. The National Internal Revenue Code (NIRC) was established as Commonwealth Act No. 466 on June 15, 1939, effective from July 1, 1939. This Code saw several amendments over the years such as the Omnibus Tax Law in 1969 (RA 6110) NIRCs of 1977 and 1986, and other presidential decrees and executive orders such as Presidential Decree No. 69 in 1972.

Republic Act No. 8424, also known as the "Tax Reform Act of 1997," was enacted on July 28, 1997. RA 8424 instituted the NIRC of 1997, which is currently the foundational law of taxation in the Philippines. The code was notably amended especially during the presidency of Rodrigo Duterte. The TRAIN Law (RA 10963) was signed into law in December 2017 and effective in January 2018. It made major amendments to personal income tax brackets and rates, as well as updated tax rules for self-employed individuals and professionals. Major amendments to corporate tax rates and incentives are also made through the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act or RA 11534, signed in March 2021 and effective on April 11, 2021. Both the TRAIN Law and the CREATE Law were part of the Duterte administration's Comprehensive Tax Reform Program (CTRP).

National taxes

The taxes imposed by the national government of the Philippines include, but are not limited to:

Income tax

Income tax for individuals

Citizens of the Philippines and resident aliens must pay taxes for all income they have derived from various sources, which include, but are not limited to:

Compensation and self-employment income

Individuals, including nonresident aliens, earning compensation income are taxed based only on the income tax schedule for individuals. On the other hand, self-employed individuals and professionals are taxed based on the income tax schedule for individuals, applicable percentage taxes, and value-added tax (VAT). However, if their gross sales (or gross receipts plus other non-operating income) does not exceed the VAT threshold, they have the option to be taxed either on the basis of the income tax schedule for individuals and the applicable percentage taxes, or just with a flat tax rate of 8% on their gross sales (or gross receipts plus other non-operating income).

Interests, royalties, prizes and other winnings

Interest income from bank deposits, deposit substitutes, trust funds, and other similar products (except for its long-term variants) is taxed at the rate of 20%.

Royalties, except on books, literary works and musical compositions, are taxed at the rate of 10%.

Prizes and winnings from Philippine Charity Sweepstakes Office (PCSO) Lotto in excess of ₱10,000 (upon which individual prizes and winnings ₱10,000 or below are taxed on the basis of the income tax schedule for individuals) are taxed at the rate of 20%.

Interest income from a depository bank under the expanded foreign currency deposit system is taxed at the rate of 15%.

Income from long-term deposits and investments, when pre-terminated in less than three years after making such deposit or investment, is taxed at the rate of 20%; less than four years, 12%; and, less than five years, 5%.

Dividends

Cash and property dividends are taxed at the rate of 10%.

Capital gains

Capital gains from the sale of shares of stock not traded in stock exchange are taxed at the rate of 15%.

Capital gains from the sale of real property are taxed at the rate of 6%, except when such proceeds would be used to construct a new principal residence within eighteen months after the sale of a previous principal residence had occurred.

Income tax for corporations

With the introduction of Republic Act No. 11534 also known as the CREATE Act, since July 1, 2020 the rate of corporate income tax has been reduced from 30% to 25% for domestic corporations, or 20% if the corporation's net taxable income for the year does not exceed ₱5 million and their total assets do not exceed ₱100 million (excluding land where the business entity's office, plant, and equipment are situated). The rate of minimum corporate income tax for domestic and resident foreign corporations was reduced to 1% that took place between July 1, 2020 and June 30, 2023, after which it has since been reverted to 2% based on the gross income of the corporations; while the rate of regular corporate income tax for non-profit proprietary educational institutions and hospitals was reduced to 1% during this period, after which it has since been reverted to 10%.

Estate tax

The transfer of the net estate is taxed at a flat rate of 6%. There is a standard deduction amounting to ₱5,000,000.

Donor's tax

The total value of gifts made in a calendar year shall be taxed at a flat rate of 6%. There is a standard deduction amounting to ₱250,000.

Value-added tax

The standard value-added tax (VAT) rate since 2006 is 12%, when Republic Act No. 9337 came into effect; previously, it had been 10% when it was first introduced by president Corazon Aquino in 1988 upon issuing Executive Order No. 273.

In 2018, the VAT threshold of annual sales was changed from ₱1,919,500 to ₱3,000,000 as a result of the passage of the Tax Reform for Inclusion and Acceleration (TRAIN) Law.

Exempt transactions

The following goods, services and transactions are exempted from the VAT:

Percentage tax

Percentage tax is a business tax imposed on persons or entities/transactions:

• who sell or lease goods, properties or services in the course of trade or business and are exempt from value-added tax (VAT) under Section 109 (w) of the National Internal Revenue Code, as amended, whose gross annual sales and/or receipts do not exceed Php 3,000,000 and who are not VAT-registered; and,
• engaged in businesses specified in Title V of the National Internal Revenue Code.

Excise taxes

Excise taxes apply to goods manufactured or produced in the Philippines for domestic sales or consumption or for any other disposition and to things imported.

Local taxes

Real property tax

One of main sources of revenues of the local government units is the real property tax, which is a tax imposed on all types of real properties including lands, buildings, improvements, and machinery.

Real Property Valuation and Assessment Reform Act

On June 13, 2024, Marcos, Jr. signed into law, R.A. 12001, the 'Real Property Valuation and Assessment Reform Act', part of Legislative-Executive Development Advisory Council and his 8-Point Socioeconomic Agenda. “It adopts the prevailing market value as the single real property valuation base and creates a Real Property Information System—a comprehensive, digitalized real property tax administration,” he explained.