Taxation in the Philippines explained

The policy of taxation in the Philippines is governed chiefly by the Constitution of the Philippines and three Republic Acts.

Taxes imposed at the national level are collected by the Bureau of Internal Revenue (BIR), while those imposed at the local level (i.e., provincial, city, municipal, barangay) are collected by a local treasurer's office.

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).[3]

Income tax schedule for individuals effective FY 2018 until FY 2022! colspan="2"
Annual taxable income !Tax to pay
Over But not over
P0 P250,000 0%
P250,000 P400,000 20% of the excess over P250,000
P400,000 P800,000 P30,000 + 25% of the excess over P400,000
P800,000 P2,000,000 P130,000 + 30% of the excess over P800,000
P2,000,000 P8,000,000 P490,000 + 32% of the excess over P2,000,000
P8,000,000 P2,410,000 + 35% of the excess over P8,000,000
Income tax schedule for individuals effective FY 2023 and onwards! colspan="2"
Annual taxable income !Tax to pay
Over But not over
P0 P250,000 0%
P250,000 P400,000 15% of the excess over P250,000
P400,000 P800,000 P22,500 + 20% of the excess over P400,000
P800,000 P2,000,000 P102,500 + 25% of the excess over P800,000
P2,000,000 P8,000,000 P402,500 + 30% of the excess over P2,000,000
P8,000,000 P2,202,500 + 35% of the excess over P8,000,000
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%.[2]

Royalties, except on books, literary works and musical compositions, are taxed at the rate of 10%.[2]

Prizes and winnings from Philippine Charity Sweepstakes Office (PCSO) Lotto in excess of P10,000 (upon which individual prizes and winnings P10,000 or below are taxed on the basis of the income tax schedule for individuals) are taxed at the rate of 20%.[3]

Interest income from a depository bank under the expanded foreign currency deposit system is taxed at the rate of 15%.[3]

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%.[2]

Dividends

Cash and property dividends are taxed at the rate of 10%.[2]

Capital gains

Capital gains from the sale of shares of stock not traded in stock exchange are taxed at the rate of 15%.[3]

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.[2]

Income tax for corporations

In general, the income tax rate for corporations is 30%.[2] However, for-profit educational institutions and hospitals enjoy a much lower rate of 10%.

Estate tax

The transfer of the net estate is taxed at a flat rate of 6%. There is a standard deduction amounting to P5,000,000.

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 P250,000.

Value-added tax

The value-added tax (VAT) rate since 2006 is 12%.[2] [5]

The new VAT threshold was changed from Php 1,919,500 to Php 3,000,000[6] [7] 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:

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.[2] [3]

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.[4]

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.[8]

Notes and References

  1. Web site: The Constitution of the Republic of the Philippines. The Corpus Juris. November 20, 2018.
  2. Web site: Republic Act 8424—Tax Reform Act of 1997.. The Corpus Juris. November 20, 2018.
  3. Web site: Republic Act 10963—Tax Reform for Acceleration and Inclusion Act of 2017. The Corpus Juris. November 20, 2018.
  4. Web site: Republic Act 7160—Local Government Code of 1991. The Corpus Juris. November 20, 2018.
  5. News: 12% VAT now in effect. January 8, 2018. GMA News. February 1, 2006.
  6. RR No. 13-2018, www.bir.gov.ph, 2018 Revenue Regulations
  7. How to Compute Income Tax Due Under the TRAIN Law, www.cpadavao.com, Posted May 22, 2019
  8. News: Aurelio. Julie. Marcos signs law that overhauls ‘outdated’ property valuation system. June 14, 2024 . Philippine Daily Inquirer. June 14, 2024.