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Every year, millions of people in the Philippines face the same annual task – staying on top of their taxes. After all, only two things are certain in life: death and taxes.
Whether you’re an employee or running your own business, missing tax deadlines can lead to detrimental consequences.
As we step into a new year (in a couple of months!), we’ll let you in on some tax planning strategies to help you avoid any potential issues with the Bureau of Internal Revenue.
The goal of this guide is to help you understand the basics of taxation, provide practical advice to ensure compliance, and help you minimize any tax-related headaches.
But before you start learning about the tax landscape in the country, you must first be aware of the key republic acts governing taxation policies in the Philippines. This includes:
- The Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Act)
- Tax Reform for Acceleration and Inclusion (TRAIN) Law
- Article VI, Section 28 of the Constitution
- The National Internal Revenue Code of 1997 (Republic Act No. 8424), also known as the Tax Reform Act of 1997, as amended
- Republic Act No. 1937, the Tariff and Customs Code of the Philippines (as amended)
- Republic Act 7160, also known as the Local Government Code of 1991, as amended
These serve as the foundation of our tax system, encompassing both national and local taxes.
National taxes are those we pay to the government through the Bureau of Internal Revenue, while local government taxation is based on the powers granted to local government units under the Local Government Code of 1991.
Tax Structure in the Philippines
The Philippines follows a territorial tax system. This means that only income generated within the Philippines or from Philippine sources is subject to taxes.
Income earned from foreign sources is generally not taxed in the Philippines, with some exceptions for certain types of income.
The Role of BIR
The Bureau of Internal Revenue or BIR is the primary agency responsible for the assessment, collection, and enforcement of internal revenue taxes and other related charges within the Philippines.
Here’s a more detailed breakdown of the BIR’s key functions:
The BIR has the power to assess taxes on individuals and businesses based on their income, transactions, financial activities, or other taxable transactions.
The assessment process involves reviewing the taxpayer’s records and financial statements to determine the amount of tax owed.
This involves sending notices to taxpayers informing them of their tax obligations.
The BIR also has the authority to impose penalties for late or non-payment of taxes, as well as to seize assets or initiate legal action against delinquent taxpayers.
Assistance and education
To help ensure everyone is in the loop about taxes, BIR offers information on tax filing procedures and tax regulations. The agency also provides guidance on how to avoid common tax-related issues.
Auditing and investigation
If there are suspicions of tax evasion, fraud, or non-compliance, the BIR may conduct an audit or investigation into the taxpayer’s financial activities.
This includes reviewing their accounts and gathering evidence to determine if any violations have been committed.
If violations are found, the BIR may impose penalties, fines, or even criminal charges.
Tax clearance and certificate issuance
The BIR also provides tax clearance and certificate issuance services to individuals and businesses. A tax clearance certificate is a document that certifies that a taxpayer has no outstanding tax liabilities or has paid all taxes due and is up to date with their tax obligations.
Policy and regulation
The agency has a key role in developing tax policies and regulations. They also work with other government agencies to make sure that tax laws and regulations are clear, consistent, and fair.
Enforcement and legal action
When necessary, the BIR has the power to enforce tax laws and regulations by taking legal action against individuals and businesses who do not comply with tax requirements.
This can include imposing fines, penalties, and even imprisonment in extreme cases of tax evasion or fraud.
What is Taxable Income?
Taxable income refers to the portion of your total income that is subject to taxation by the government. In simpler terms, it’s the money you earn on which you have to pay taxes.
Types of Taxes in the Philippines
To understand taxation, it’s essential to know the different types of taxes imposed by the government.
This type of tax is directly levied on an individual or business, and the burden of paying it falls on the same person or entity. Here are the different types of direct taxes.
Income tax is imposed on the yearly profits or earnings that individuals and businesses generate from various sources, such as property, professions, trades, or offices.
Individual or personal income tax rates
Individual income tax follows a progressive tax rate structure, where the tax rate increases as income levels rise.
|0 – PHP 250,000||0%|
|PHP 250,001 to PHP 400,000||15%|
|PHP 400,001 to PHP 800,000||20%|
|PHP 800,001 to PHP 2,000,000||25%|
|PHP 2,000,001 to PHP 8,000,000||30%|
|Above PHP 8,000,000||35%|
Corporate income tax
Corporate income tax is a tax imposed on the net income or profits of corporations, partnerships, and other entities engaged in trade or business within the Philippines. It is based on a fixed rate.
Philippine corporations are taxed on their total global income. However, non-resident corporations are only taxed on income they generate in the Philippines.
Meanwhile, a foreign corporation with a branch in the Philippines is subject to taxation on the income generated in the country. Branch taxable income is calculated in the same way as subsidiary taxable income.
Effective from July 1, 2020, Philippine corporations are taxed at a rate of 25% (from 30%). This doesn’t include corporations who have a net taxable revenue of less than PHP5 million and total assets of less than PHP100 million, which is taxed at a rate of 20%.
|Corporate income tax||20% to 25%|
|Branch office tax||25%, plus additional 15% tax on after-taxation profits remitted to foreign headquarters|
The following are the different withholding taxes you should know.
When a resident company distributes dividends, they are liable to the following taxes.
|Citizen and resident alien||10%|
|Non-resident alien engaged in trade or business||20%|
|Non-resident alien not engaged in trade or business||25%|
|Resident foreign corporation||0%|
|Non-resident foreign corporation||15% or 30%|
For interest payments made to non-residents, a 20% withholding tax applies, unless a tax treaty specifies otherwise.
|Interest from time deposits, bank savings, deposit substitutes, and money market placements received by domestic/resident foreign corporations from a domestic corporation||20%|
|Interest from FCDU deposits||15%|
In the case of royalty payments, domestic or resident companies are subject to a final withholding tax of 20%. However, a 25% withholding tax rate is applied to royalty payments made to non-residents.
|Royalty payments from domestic or resident companies||20%|
|Royalty payments made to non-residents||25%|
Fringe Benefit Tax
The FBT rate is set at 35% of the grossed-up monetary value of the fringe benefit.
This tax is imposed on non-wage benefits that employees receive as part of their basic compensation package. This includes goods, services, or other benefits granted in cash or in kind.
The benefits include, but are not limited to the following:
- Expense accounts
- Household personnel
- Interest on loans at below market rate
- Club membership fees
- Expenses for foreign travel
- Holiday and vacation expenses
- Education assistance
- Life or health insurance and other non-life insurance premiums
Keep in mind that this tax is not imposed when the fringe benefits are considered necessary to the nature of your business.
|Employee is a citizen/resident alien/non-resident alien engaged in trade or business within the Philippines||35%|
|Employee is a non-resident alien not engaged in trade or business within the Philippines||25%|
Capital Gains Tax
It is typically imposed when an individual or entity realizes a gain by selling an asset for a higher price than the original purchase price.
|Sale of real property||6% of the property’s selling price or its fair market value, whichever is higher.|
|Shares of stock not listed and traded in the PSE||15% of net capital gains|
|Shares of stock listed and traded in the PSE||6% of the selling price or fair market value, whichever is higher|
This is levied on the right of a deceased person to transfer their estate to their lawful heirs and beneficiaries upon their death.
It is imposed on the total value of the assets and properties left behind by the deceased individual, and it is calculated based on a graduated schedule of tax rates.
This tax is also applicable to certain transfers that are considered equivalent to testamentary dispositions, such as certain gifts made shortly before the individual’s death.
|Over||But not over||Tax||Plus||Of the excess over|
|PHP2 million||PHP5 million||PHP135,000||11%||PHP2 million|
|PHP5 million||PHP10 million||PHP465,000||15%||PHP5 million|
|PHP10 million||PHP1,215,000||20%||PHP10 million|
Donor’s tax in the Philippines is a tax imposed on the act of giving property as a gift while the giver (also called donor) is still alive.
This tax applies when someone transfers property to another person or entity out of generosity, without expecting much in return, and without being legally obligated to do so.
Whether the donor is a resident or non-resident of the Philippines, this tax is imposed on the privilege of making such a gift.
Keep in mind that this is different from estate tax, which is levied on the transfer of property upon a person’s death.
|Total gifts not exceeding PHP250,000||Exempt|
|In excess of PHP250,000||6%|
The opposite of direct taxes, this tax is imposed on goods and services at the point of consumption.
Value Added Tax
Also called VAT, this tax is imposed on the sale of goods and services. It is levied on the value added to a product or service at each stage in its production or distribution and ultimately passed on to the final consumer.
|Sales of good and properties||12%|
|Sales of services||12%|
|Importation of goods||12%|
Excise tax is a type of indirect tax that is levied on specific goods, such as alcohol, tobacco products, petroleum products, and automobiles.
This tax is imposed on the manufacturer or importer of these goods, but the cost is ultimately passed on to the end consumer.
Check out this page for the updated table.
Documentary Stamp Tax
This is for a variety of legal and commercial documents. These include deeds, contracts, and other instruments that relate to the transfer or conveyance of property rights or financial obligations.
Here are some additional local taxes you should account for.
Real Property Tax
This tax is for immovable properties such as land, buildings, machinery, and other improvements that are permanently attached to the land.
This tax is imposed on the privilege of owning or holding real estate within the jurisdiction of a local government unit (LGU), such as a city or municipality.
It is a significant source of revenue for LGUs and is used to fund local public services and infrastructure development.
This is enforced by LGUs on businesses operating within their jurisdiction. It is based on the gross sales or gross receipts of a business for the previous fiscal year.
The rate varies depending on the location of the business but should not exceed 3% of the gross sales or gross receipts.
Tax on Transfer of Real Property Ownership
This tax is imposed when real property is sold, donated, bartered, or transferred to another owner.
Tax on Business of Printing and Publication
This is for businesses engaged in printing and publishing materials like books, posters, pamphlets, and the like that are subject to this tax.
Businesses with franchises are taxed at a rate not exceeding 50% of 1% of their gross annual receipts from the previous year within their jurisdiction.
Tax on Sand, Gravel, and Quarry Resources
This tax applies to resources like stones, sand, gravel, and earth extracted from public lands, waters, or riverbeds within the local government’s jurisdiction.
Professionals who are required to pass government exams are obligated to pay an annual professional tax.
The proprietors of entertainment venues, including theaters and concert halls, are required to collect this tax from patrons.
Annual Fixed Tax for Delivery Vehicles
Manufacturers, wholesalers, dealers, or retailers using delivery vehicles for products like liquors, soft drinks, and tobacco pay this annual fixed tax.
Tax on Business
Businesses must pay this tax to secure a business license or permit to start operations. This is what businesses pay to get a Business Mayor’s Permit. Rates may vary among cities and municipalities.
Fees for Sealing and Licensing of Weights and Measures
Charges for certifying and licensing weighing and measuring equipment are determined by the local government.
Fishery Rentals, Fees, and Charges
Fees are imposed on individuals granted fishery privileges in municipal or city waters.
Levied on individuals 18 years and older engaged in work, business, or owning property with a certain assessed value.
Corporations doing business in the Philippines are also subject to this tax.
Barangay Taxes on Stores or Retailers
This is for businesses with gross sales of receipts of the preceding calendar year of P50,000.00 or less for cities, and P30,000.00 or less for municipalities.
The rate should not exceed 1% on such gross sales or receipts.
Service Fees or Charges
Barangays can collect fees for services related to the use of barangay-owned properties or facilities.
A reasonable fee is collected for issuing a barangay clearance. This is usually required for various government transactions.
Tax Incentives and Exemptions in the Philippines
The government offers many tax incentives and exemptions to help promote economic growth, attract investments, and support various sectors.
1. Special Economic Zones and their tax benefits
Special Economic Zones (SEZs) are designated areas in the Philippines that enjoy unique tax privileges and incentives to encourage investments and economic activities.
These zones are typically established in strategic locations to spur development and job creation.
Some of the tax benefits associated with SEZs include income tax holidays, as well as duty-free importation to decrease production costs.
2. Tax holidays and other incentives for businesses
Export-focused businesses can enjoy a tax break called the Income Tax Holiday or ITH for 4 to 7 years and choose between a low Special Corporate Income Tax (SCIT) rate of 5% or extra tax deductions for 10 years.
Meanwhile, companies targeting the local market can also get an ITH for 4 to 7 years and opt for enhanced deductions for 5 years.
3. Exemptions for certain individuals and entities
The Philippine tax system also provides exemptions for specific individuals and entities such as:
Senior Citizen and Persons with Disabilities (PWD) Exemptions
Senior citizens and PWDs may be eligible for income tax exemptions, as well as VAT exemptions or discounts on specific goods and services.
Exemptions for Cooperatives
Cooperatives engaged in certain activities may benefit from exemptions on income tax, as well as VAT privileges.
Nonprofit and Charitable Organizations
Non-profit entities engaged in charitable, religious, cultural, or educational activities may enjoy tax exemptions and incentives.
Tips for Effective Tax Planning in the Philippines
Take a look at some of the best practices for effective tax planning in the Philippines:
1. Income Splitting
As stated above, the Philippines has a progressive tax system which means higher incomes are subject to higher tax rates.
By distributing income among family members, you can potentially reduce the overall tax liability on that income.
Furthermore, some individuals or entities may be eligible for tax credits to offset their tax liability. Income splitting allows you to allocate income to individuals with available tax credits, therefore reducing the overall tax burden.
Income splitting can also be a strategy for those with huge estates who want to actualize an estate planning strategy.
By transferring income or assets, the size of your estate can be reduced. This helps facilitate the smooth transfer of wealth to the next generation.
2. Timing of income and expenses
This tip involves the deliberate deferral or acceleration of income and deductions to optimize an individual or business tax situation.
Managing capital gains, utilizing carryovers, meeting income thresholds, and aligning with business planning are all part of the possibilities with this strategy.
By following this tip, you can manage your tax rate effectively by choosing when to recognize income or incur expenses.
Smoothing your tax liability over multiple years is also possible if you want to avoid sudden spikes in tax payments.
Moreover, you can reduce your taxable income for the current year by deferring income and accelerating deductions to lower your tax liability.
This strategy also maximizes the utilization of available deductions and exemptions.
Keep in mind that timing should always adhere to tax laws and be based on legitimate financial and business decisions.
3. Utilizing tax credits and deductions
It is recommended to take full advantage of available tax credits and deductions to reduce your overall tax liability.
Tax credits are direct reductions in the amount of tax you owe. Ensure that you claim all eligible tax credits you qualify for.
For example, if you donate to a BIR-accredited charity, you can claim a tax credit for the donated amount.
4. Investing in Tax-Advantages accounts
Utilizing the following tax-advantaged and tax-efficient accounts can help you grow your wealth and secure your financial future while minimizing the impact of taxes.
Pag-IBIG HDMF (Home Development Mutual Fund) – MP2
Consider investing in this tax-free savings account, offering attractive dividend rates (usually 5-7%) and a 5-year maturity period.
The earnings from MP2 are tax-free, allowing your savings to grow faster.
SSS (Social Security System) Flexi and Peso Funds
For Overseas Filipino Workers (OFWs), the Flexi Fund is an option that invests in 91-day T-bills, while the Peso Fund is invested in 5-year T-bonds and 365 T-bills.
Contributions and interest in these funds are not subject to tax.
PERA (Personal Equity Retirement Account)
With PERA, you can enjoy a 5% tax credit on annual contributions. Moreover, the income and withdrawals after retirement (usually at age 55) are tax-exempt.
This account offers a tax-efficient way to save for retirement.
Tax-Efficient Investment Accounts
ETFs in particular are very tax-efficient since you will be only taxed when you sell your shares. This helps you enjoy tax deferral.
Some mutual funds are specifically designed to minimize tax burdens for investors.
While they may come with higher costs due to specialized services, they can be worthwhile if you have a higher income and are in a higher tax bracket.
Real Estate Investment Trusts (REITs) and REIT-ETFs
These investment options provide tax-efficient exposure to the real estate market.
Non-Taxable Income Sources
Certain income sources and services are exempt from taxation, such as insurance proceeds (in most cases), riders for disability and critical illness, employer-provided insurance (life/health), municipal bonds (with tax-free interest earnings), tax-exempt money market funds (for parking cash), and Health Savings Accounts (HSAs) for medical expenses with tax-free compounding.
5. Tax incentives and exemptions
Most tax incentives and exemptions provide opportunities to minimize tax liabilities and promote economic growth at the same time.
As stated above, availing Special Economic Zone (SEZ) Benefits gives you substantial tax benefits if you operate in these designated zones.
For example, your business will be exempt from paying income tax for a specific period. You may even enjoy duty-free importation of essential equipment and streamlined customs procedures.
The Philippine government even offers various tax holidays and incentives designed to stimulate business growth.
Meanwhile, Research and Development tax incentives provide deductions and exemptions for R&D-related expenses to encourage innovation. Export-oriented businesses can also benefit from VAT zero-rating and exemptions on export earnings.
Also, the Alternative Modes of Compliance (AMoC) allow businesses to choose the most tax-efficient treatment applicable to their industry.
Finally, exemptions are available for specific individuals and entities. By understanding and capitalizing on these incentives, businesses can optimize their tax positions.
6. Considerations for Business Owners
For business owners in the Philippines, there are several strategies that can help minimize taxes.
One crucial decision is choosing the right business structure, such as a sole proprietorship, partnership, or corporation.
Each structure has its own tax implications, and selecting the one that aligns with your business goals and financial circumstances is essential for tax efficiency.
Proper documentation and record-keeping are also equally important. It should be your priority to have accurate records of income, expenses, and transactions that allow you to claim legitimate deductions and credits while staying compliant with tax regulations.
This practice not only minimizes the risk of audits and penalties but also ensures you’re making the most of available tax benefits.
Deducting business expenses and capital allowances is another vital strategy. Business owners can deduct various expenses related to their operations, such as rent, salaries, utilities, and interest on business loans.
Additionally, capital allowances can be claimed for asset depreciation.
Lastly, regularly assess your business activities for opportunities to optimize tax efficiency. This step includes identifying tax credits and incentives.
7. Real estate and capital gains
When selling real estate or other capital assets, you may incur significant capital gains tax. To minimize this tax, consider the following tips:
Hold for the long term
Holding your property for at least one year before selling it can result in lower capital gains tax rates. The longer you hold, the lower the tax rate becomes.
Utilize the Family Home Exemption
Individuals who sell real property in the Philippines are subject to a tax rate of 6% based on either the property’s selling price or its fair market value, whichever amount is higher.
However, there is an exception to this rule when the property being sold is the individual’s principal residence and the proceeds from the sale are used to purchase or build a new principal residence.
This exemption can be used once every 10 years.
Offset Gains with Losses
If you have incurred capital losses from other investments, you can offset these against your capital gains to reduce your overall tax liability.
Understand your property tax implications
Taxpayers in the Philippines should also have a thorough understanding of real property tax implications.
This is imposed on land, buildings, and improvements in the Philippines. To navigate this tax efficiently, keep these tips in mind:
- Know Your Property Classification: Properties are classified into different categories, each with its own tax rates. Ensure that your property is correctly classified to avoid overpaying.
- Keep Updated Records: Keeping accurate records of payments and deadlines can help you manage your tax obligations effectively.
- Check for Exemptions: Certain properties may qualify for exemptions or reduced tax rates, such as agricultural land or properties used for low-cost housing.
- Consider Tax Amnesty Programs: The Philippine government periodically offers tax amnesty programs that allow property owners to settle arrears at reduced rates. Participating in such programs can provide relief from overdue taxes.
- Review Property Valuations: Real property tax is based on assessed property values. Regularly review the valuation of your property to ensure it accurately reflects its market value and avoid over assessment.
8. Estate Planning and Donor’s Tax
Take a look at the following tips to help you reduce estate tax liability through strategic gifting:
Certain gifts are entirely exempt from donor’s tax, including those made to the government or charitable institutions. By directing your gifts toward these exemptions, you can minimize tax liability.
Gradual Wealth Transfer
Plan to gradually transfer assets to heirs over time rather than waiting until later stages of life to spread out potential tax liabilities.
Setting Up Trusts and Other Estate Planning Tools
Trusts and estate planning tools can be effective in minimizing estate tax liability and ensuring the smooth transfer of assets:
- Irrevocable Trusts: Transferring assets into an irrevocable trust can remove them from your taxable estate.
- Life Insurance: Consider using life insurance policies to provide tax-free benefits to beneficiaries. The proceeds are typically not subject to estate tax, making it a useful tool for wealth transfer.
- Family Corporations: Some families opt to establish family corporations to manage assets and facilitate their transfer to heirs more efficiently.
9. Seeking professional advice
Tax professionals and accountants are experts in taxes. Their deep knowledge and experience allow them to uncover deductions, credits, and exemptions you might overlook.
Remember that Philippine tax laws change frequently and it is the job of these professionals to stay up-to-date with these shifts and understand how they impact taxpayers.
Furthermore, they are helpful in assessing your financial situation, business activities, and goals to create customized tax strategies that consider factors like income sources, investments, deductions, and exemptions.
When it comes to audit or tax disputes, tax professionals also provide valuable assistance and can represent you before tax authorities, address questions, and ensure your tax records are well-prepared and compliant with laws.
This decreases the stress and potential financial impact of audits.
10. Using digital tools and software
Using digital tools and software can greatly simplify the tax filing process and help you stay organized.
For example, tax software will take the bulk of the hassle out of tax planning and filing. This not only saves you time but also reduces the chances of errors in your tax returns.
In many ways, going digital with record-keeping can also be a game-changer. This involves storing your financial documents, receipts, and transaction records electronically. They’re also less likely to get lost or damaged.
A tax software will also do the math for you, therefore reducing manual data entry and keeping you informed about tax changes in real-time.
Most tax software providers also come with strong security features to protect your financial data, plus they are compliant with government regulations and guidelines.
Lastly, digital tools let you manage your taxes from anywhere with an internet connection. This flexibility is particularly useful for professionals who are always on the go or have multiple businesses to manage.
Check out our in-depth guide on finance apps to know the best personal finance online tools for taxes in the Philippines.