Tax in the Philippines

Resident citizens are subject to tax on worldwide income. Non-resident citizens, resident aliens and non-resident aliens are subject to tax on income from Philippine sources.

Under Section 22E of the Tax Code, the term 'non-resident citizen' means a citizen who meets one of the following conditions:

• establishes to the satisfaction of the Commissioner of Internal Revenue the fact of his or her physical presence abroad with a definite intention to reside therein
• leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis
• works and derives income from abroad and whose employment requires him or her to be physically present abroad most of the time during the taxable year
• has been previously considered as a non-resident citizen and arrives at any time during the taxable year to reside permanently in the Philippines, with his or her income derived from sources abroad until the date of his or her arrival in the Philippines

The term 'most of the time during the taxable year' generally means presence abroad for more than 183 days during the year. However, in determining a Filipino citizen’s residency status, the Bureau of Internal Revenue (BIR) considers other factors such as assignment term, location of payroll, assignee’s employment status in the Philippines and residency status in the host country. As the BIR’s interpretation may change from time to time, consultation with a tax advisor is highly recommended.

For foreign nationals, residence is determined by the length and nature of an individual’s stay in the Philippines. An alien who comes to the Philippines for a definite purpose that is promptly accomplished is not deemed to be resident. However, if they make their home temporarily in the Philippines to accomplish their purpose, the alien becomes a resident even though it may be their intention at all times to return to their domicile abroad. Aliens who reside in the Philippines with the intention to remain permanently are considered resident. Aliens who acquire residence in the Philippines remain residents until they depart with the intention of abandoning that residence.

Non-resident aliens are classified as either engaged or not engaged in trade or business in the Philippines. A non-resident alien who stays in the Philippines for more than a total of 180 days during any calendar year is deemed to be engaged in trade or business in the Philippines; any other non-resident alien is deemed to be not engaged in trade or business in the Philippines.

Gross income includes compensation, income from the conduct of a trade, business or profession, and other income, including gains from dealings in property, interest, rent, dividends, annuities, prizes, pensions and partners’ distributive shares.

Employment income – Employment income includes all remuneration for services performed by an employee for their employer under an employer-employee relationship. The name by which compensation is designated is immaterial. It includes salaries, wages, emoluments and honoraria, allowances, commissions, fees including director’s fees for a director who is also an employee of the firm, bonuses, fringe benefits, taxable pensions and retirement pay and other income of a similar nature. Emergency cost-of-living allowances received by employees are also included in their compensation income.

Employment income received for services provided in the Philippines is subject to tax in the Philippines regardless of where the compensation is paid. Remuneration for services remains classified as compensation even if paid after the employer-employee relationship is ended.

Taxable employment income equals employment income less exclusions. With the passage of the Tax Reform for Acceleration and Inclusion (TRAIN) Act (Republic Act [RA] No. 10963), personal and additional exemptions and premium payments on health and/or hospitalisation insurance are no longer considered as deductions from employment income of citizen and resident alien taxpayers. As a result, beginning with the 2018 tax year, these deductions may no longer be deducted from employment income to arrive at taxable employment income. Non-resident aliens not engaged in trade or business in the Philippines remain taxable on their gross income.

Business income – Gross income from the conduct of a trade or business or the exercise of a profession may be reduced by certain allowable deductions.

Professional fees paid to individuals are subject to a 10% creditable expanded withholding tax (EWT) if the individual earns gross income of more than PHP 3 million during the year or if the individual is VAT-registered, regardless of the amount of their gross income. If an individual has gross income during the year of PHP 3 million or less, the professional fees are subject to a creditable EWT of 5%.

Under certain circumstances, self-employed persons may carry forward business losses for three years, unless a 25% change in the ownership of the business occurs. Carry-backs are not permitted.

Directors’ fees – Directors’ fees derived by individuals who are employees of the same company are taxed as income from employment and are subject to creditable withholding tax on wages. Directors’ fees derived by individuals who are not employees of the same company are included in the recipients’ business income and are subject to a creditable withholding tax. The rate of the withholding tax is 10% if the gross income for the current year exceeds PHP 3 million. Otherwise, the rate is 5%. Directors’ fees derived by non-resident aliens deemed to be not engaged in a trade or business are subject to a final withholding tax at a rate of 25%.

Investment income – In general, interest on peso deposits and yields, or any other monetary benefit derived from deposit substitutes, trust funds and similar arrangements, is subject to a final 20% withholding tax. However, interest on certain long-term deposits or investments evidenced by qualifying certificates is exempt from the final 20% withholding tax. Final tax is imposed at rates ranging from 5% to 20% on the income from long-term deposits if the investment is withdrawn before the end of the fifth year. Interest received by residents on foreign-currency deposits is subject to a final 15% withholding tax. Interest received by non-resident individuals on foreign-currency deposits is exempt from tax.

Cash or property dividends actually or constructively received by citizens and resident aliens from domestic corporations, as well as a partner’s share in the after-tax profits of a partnership (except a general professional partnership), are subject to final withholding tax at a rate of 10%. Non-resident aliens engaged in a trade or business in the Philippines are subject to final withholding tax on these types of income at a rate of 20%. For non-resident aliens not engaged in a trade or business in the Philippines, investment income is generally taxed at a rate of 25%, except for gains from sales of real estate and sales of shares of domestic corporations.

Rental income – Rental income is considered business income and is taxed at the standard rates.

Taxation of employer-provided stock options – In general, employer-provided stock options are taxable to the employee as additional compensation or fringe benefit at the time the option is exercised. Revenue Memorandum Circular (RMC) No. 79-2014 provides for the tax treatment of employee income arising from the grant, exercise and sale of stock options. It states that for both Equity Settlement Options and Cash Settlement Options, the difference between the book value or fair market value of the shares, whichever is higher, at the time the stock option is exercised, and the price fixed on the grant date shall, on exercise of the option, be treated in the following manner:

• additional compensation subject to income tax and to withholding tax on compensation, if the option is granted by an employer to a rank-and-file employee involving the employer’s own shares of stock or shares owned by it
• a fringe benefit subject to FBT, if the employee receiving and exercising the option occupies a supervisory or managerial position

The RMC also imposed reportorial requirements on the issuing corporation with respect to the grant and exercise of options.

In general, capital gains are included in an individual's regular taxable income and are subject to tax at the usual rates. The gain is the excess of the amount realised from the disposal of the asset over the adjusted basis. If the asset is held for 12 months or less prior to disposal, the entire gain or loss is reported. For assets held longer than 12 months, 50% of the gain or loss is reported. The holding period rules do not apply to capital gains derived from the sale of real property in the Philippines or shares of stock in a domestic corporation.

Capital losses are deductible only to the extent of capital gains. Losses carried over are treated as short-term capital losses. Losses incurred from wash sales of stocks or securities are not deductible, unless incurred by a dealer in the ordinary course of business. This rule does not apply to shares of stock in a domestic corporation or to sale of real property described below.

A final tax of 6% is imposed on capital gains derived from transfers of real property located in the Philippines. The tax is based on the higher of the gross sales price and the fair market value.

Capital gains derived from the sale of shares in unlisted domestic corporations are taxed at a rate of 15%. The amount of the taxable gain is the excess of the sale price over the cost of the shares. In cases of transfers for less than an adequate and full consideration in money or money’s worth, the amount by which the fair market value exceeded the value of the consideration is deemed to be a gift and is included in computing the amount of gifts made during the calendar year. However, transfers below consideration that are made in the ordinary course of business (a transaction that is bona fide, at arm’s length, and free from any donative intent) is considered to be made for an adequate and full consideration in money or money’s worth.

Gains derived from the sale of listed shares are exempt from capital gains tax. However, a percentage tax (stock transaction tax) is imposed at a rate of 0.6% on the gross selling price of the shares.

Gains derived by resident citizens from the sale of shares in foreign corporations are taxed as capital gains, subject to the regular income tax rates.

An estate tax is imposed at a fixed rate of 6% on the transfer of a decedent’s net estate. Citizens, regardless of whether resident at the time of death, and resident aliens are taxed on their worldwide estates.

For estate tax purposes, only the part of a non-resident alien decedent’s estate located in the Philippines is included in the taxable estate. Under specified conditions, deductions may be permitted for certain items, including expenses, losses, debt, taxes and the value of property previously subject to estate or gift tax or of property transferred for public use.

To prevent double taxation of estates, the Philippines has concluded an estate tax treaty with Denmark.

Residents and non-residents are subject to gift tax, which is payable by the donor on total net gifts made in a calendar year. Citizens and resident aliens are subject to gift tax on worldwide assets. Non-resident aliens are subject to gift tax on their Philippine assets only.

Tax on the donor is imposed at a fixed rate of 6% of the total gifts in excess of the PHP 250,000 exemption for gifts made during the calendar year. This is regardless of whether the donee is a stranger.

All individuals working in the Philippines must pay social security contributions. The employee’s contribution is approximately 4% of salary and is withheld by the employer. The employer’s contribution is approximately 8% of employees’ salaries. Self-employed persons must be covered. The minimum monthly salary subject to social security contributions is PHP 1,000. The maximum monthly contributions are PHP 1,630 for employers and PHP 800 for employees, which apply to employees receiving monthly compensation of PHP 19,750 or more.

Employees age 60 or younger and their employers are compulsorily covered by the Social Security System (SSS). Individuals who are covered by the SSS are compulsorily covered by the Philippine National Health Insurance Program (Philhealth) and the Home Development Mutual Fund (HDMF). Compulsory contributions to the SSS, Philhealth and HDMF are deductible from the gross income of an individual. Voluntary contributions to these institutions in excess of the amount considered compulsory are not deductible and, accordingly, not exempt from income tax and withholding tax.

For the 2020 calendar year, the employee’s total maximum compulsory monthly contribution to these entities amounts to PHP 1,800. Employers’ maximum monthly contributions to these entities amount to PHP 2,630 The monthly contribution varies depending on the salary bracket of the individual.

PhilHealth has introduced new guidelines for Overseas Filipinos with the issuance of PhilHealth Circular No. 2020-0014, dated 2 April 2020, increasing the premium rates applicable from 2.75% in 2019 to 3% in 2020. However, this measure is temporarily suspended.

An income tax return must be filed, and the tax due paid, on or before 15 April for income derived in the preceding year. If tax due exceeds PHP 2,000, it may be paid in two equal instalments, the first at the time of filing the return and the second by 15 October following the end of the relevant tax year.

In prior years, the BIR allowed the manual filing of income tax returns. However, with the issuance of RR 5-2015, which amends RR 6-2014, it is now mandatory for taxpayers enumerated under RR 6-2014 to use the eBIR Forms facility. This means that the tax returns, including individual income tax returns (BIR Forms 1700 and 1701), must be prepared using eBIR Forms. The returns must be filed through the online eBIR Forms System. A penalty of PHP1,000 is imposed for each return not filed electronically. The taxpayer is also liable for a civil penalty amounting to 25% of the tax due to be paid for filing a return in a manner not in compliance with existing regulations, thus tantamount to wrong-venue filing. Other individual taxpayers who do not fall in the categories in RR 6-2014 or are exempted may still file manually by using the printed BIR Form or using the form generated from the Offline eBIR Forms either manually or electronically by online submission or e-Filing.

A separate return must be filed, and any tax due paid, within 30 days after each sale of shares not traded on a local stock exchange and the sale of real property considered to be a capital asset. For a sale of real property considered to be an ordinary asset, a separate return must be filed, and any tax due paid on or before the 10^th day following the month of the transaction.

Non-resident aliens engaged in trade or business must file income tax returns.

For income subject to final withholding tax, the taxpayer is not required to file a tax return if such income is their sole income from the Philippines. The withholding agent is responsible for reporting the income and remitting the tax withheld.

Foreign taxes paid or incurred in connections with a taxpayer’s profession, trade or business may be deducted from gross income, subject to exceptions. Resident Filipino citizens may claim a credit for income tax due to any foreign country; the credit may not exceed the Philippine income tax payable on the same income multiplied by a fraction, the numerator of which is the taxable income from foreign countries and the denominator of which is worldwide taxable income.

The Philippines has entered into double tax treaties with 43 countries and is negotiating tax treaties with a further 9 countries.