term paper about taxation in the philippines

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The feasibility of reducing personal income tax in the Philippines: Its implications to National Internal Revenue Code and National Revenue

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A Guide to Taxation in the Philippines

The taxation policy in the Philippines is chiefly governed by the following Republic Acts:

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; and
Local Government Code of 1991.

Tax structure

The country imposes a territorial tax system, meaning only Philippine-sourced income is subject to Philippine taxes.

Corporate income tax

From July 2020 to 2022, foreign companies will be eligible for a reduced corporate income tax (CIT) rate of 25 percent, down from the regular rate of 30 percent. The reduction in the headline CIT rate was passed by the CREATE Act, which also stipulates the further reduction of the CIT rate by one percent per year to finally reach 20 percent in 2027 for foreign companies.

Domestic micro, small, and medium-sized companies will directly benefit from a preferential rate of 20 percent (businesses with taxable income of up to PHP 5 million (US$89,270) and not exceeding PHP 100 million (US$1.7 million).

The CIT of 25 percent is levied on net income on all sources. Non-resident companies are taxed only on their Philippine-sourced income. Domestic companies are taxed on their worldwide income.

Minimum corporate income tax

A minimum corporate income tax (MCIT) of two percent is imposed on the gross income of both domestic and resident foreign corporations, on an annual basis. It is imposed from the beginning of the fourth taxable year immediately following the commencement of the business operations of the corporation. The MCIT is imposed when the standard 20 percent CIT is lower than the two percent MCIT on the company’s gross income. Any excess of the MCIT over the normal tax may be carried forward and credited against the normal tax for the three immediately succeeding taxable years.

Withholding tax

Dividends distributed by a resident company are subject to withholding tax at 25 percent; those distributed to non-residents are taxed at 15 percent, provided the country of the non-resident recipient allows a tax credit of 15 percent. The withholding tax may be reduced under an applicable tax treaty.

Interest paid to a non-resident is subject to a 20 percent withholding tax unless otherwise stipulated under a tax treaty.

Royalty payments made to a domestic or resident company are subject to a final withholding tax of 20 percent. A 25 percent withholding tax is levied on royalty payments to non-residents.

Fringe benefits tax

Fringe benefits granted to supervisory and managerial employees are subject to a 35 percent tax on the grossed-up monetary value of the fringe benefit. Under new income tax regulations, fringe benefits mean any good, service, or other benefit granted in cash or in kind, other than the basic compensation, by an employer to an individual employee.

The benefits include, but are not limited to: housing, expense accounts, vehicles, household personnel, interest on loans at below market rate, club membership fees, expenses for foreign travel, holiday and vacation expenses, education assistance, and life or health insurance and other non-life insurance premiums.

Fringe benefits tax, however, is not imposed when the fringe benefits are deemed necessary to the nature of your business.

Branch profit remittance tax

Branches of foreign companies in the Philippines, except those registered with the Philippine Economic Zone Authority, are subject to income tax at the rate of 30 percent of their income derived within the Philippines. A 15 percent branch profit remittance tax (BPRT) is levied on the after-tax profits remitted by a branch to its head office. After-tax profits remitted by a branch do not include income items that are not effectively

connected with the conduct of its trade or business in the Philippines. Such income items include interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages, premiums, annuities, emoluments or other fixed or determinable annual, periodic, or casual gains, profits, income, and capital gains received during each taxable year from all sources within the Philippines.

Improperly accumulated earnings tax

Income accumulated by closely held corporations with the purpose of avoiding tax attracts an improperly accumulated earnings tax (IAET) of 10 percent. The closely held corporation may refer to companies wherein at least 50 percent of the capital stock or voting power is owned directly or indirectly by not more than 20 individuals.

The criteria to determine the liability for the IAET is the purpose of the accumulation of the income and not the consequences of the accumulation. That is, if a company allows its earnings or profits to accumulate within its reasonable needs, then it would not be subject to the tax unless proven to the contrary.

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Personal income tax

The Philippines implements a progressive personal income tax rate of up to 35 percent. The TRAIN Act, which was passed at the end of 2017, stipulated provisions to reduce personal income tax on all taxpayers except those in the highest income bracket. Taxpayers in all income brackets below PHP 8 million (US$142,900) will therefore see between a two and five percent reduction in personal income tax rate from January 1, 2023, onwards.

Value-added tax

The 12 percent value-added tax (VAT) rate is imposed on most goods and services that have achieved actual gross sales of over PHP 3 million (US$53,562).

VAT exemption for exporters of local purchases

The Philippines issued a value-added tax (VAT) exemption for registered exporters on their local purchases of goods and services through Revenue Regulations (RR) No. 21-2021.

The VAT privilege covers the sale of equipment, supplies, packaging materials, and goods, among others, for a maximum period of up to 17 years.

What services are subject to VAT exemption?

The services performed by a VAT-registered person that is subject to VAT exemption are as follows:

Sale of raw materials, packaging materials, supplies, inventories, and goods, to a registered enterprise and used in its registered activity;
Sale of services, including the provision of basic infrastructure, maintenance, utilities, and repair of equipment, to a registered enterprise;
Services rendered to persons engaged in air transport operations or international shipping, including leases of property, provided that these services are exclusively used for air transport operations or international shipping;
The transport of passengers and cargo by domestic air or sea vessels from the Philippines to a foreign country;
Sales to persons or entities who are exempted from direct and indirect taxes under special international agreements to which the Philippines is a signatory;
The manufacturing, processing, or repacking of goods for persons or entity that is doing business outside of the Philippines, and the said goods are subsequently exported and paid for by foreign currency; and
The sale of power is generated through renewable resources such as geothermal and steam, hydropower, biomass, solar, and wind, among others.

New registered export enterprises under CREATE can enjoy the VAT exemption for a maximum of 17 years starting from the date of registration. Meanwhile existing registered export companies located inside freeport zones and ecozones, the VAT exemption shall be until the expiration of the transitory period.

A registered export enterprise is a corporation, partnership, or other entity established under Philippine laws and registered with an Investment Promotion Agency (IPA). They must also engage in manufacturing, assembling, or processing activities that result in the direct exportation of manufactured or processed products.

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Home — Essay Samples — Economics — Taxation — Importance of Taxation in the Philippines: the Republic Act and the Corporate Recovery

Importance of Taxation in The Philippines: The Republic Act and The Corporate Recovery

Categories: Philippine Government Tax Taxation

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Published: Feb 11, 2023

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The problem with our tax system and how it affects us

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This is AI generated summarization, which may have errors. For context, always refer to the full article.

The problem with our tax system and how it affects us

President Duterte’s plan to overhaul our tax system is arguably his most highly-anticipated and consequential policy thus far into his term. The plan, originally crafted by the Department of Finance, aims for a “simpler, fairer, and more efficient” tax system that will promote investments, create jobs, and reduce poverty. Many sectors have expressed support for it, including a group of former DOF and NEDA secretaries . But some lawmakers have branded the tax proposal as “heartless” and “anti-poor” because of, say, the planned increase on fuel taxes. Others have also questioned certain spending items in the General Appropriations Act of 2017 that do not merit the additional revenues that tax reform will yield. In this article, we step back from the politics of it all and look at the current state of the Philippines tax system. We focus on 5 issues which, to our mind, demonstrate best the present deficiencies (or “structural weaknesses”) of our tax system. In each, we show how the current state of things deviates from well-known principles of taxation. 1. We have some of the highest income tax rates in the region. Principle of taxation : High income taxes could discourage firms from producing more goods or employees from working more hours. Hence, a good tax system makes sure that income tax rates are not too high so as to discourage economic activity. The problem : The Philippine tax system currently has some of the highest income tax rates in this region. Compared to our major ASEAN counterparts, our corporate income tax is the highest at 30%, a rate that “turns off” foreign investors who prefer to do business in our low-tax neighbors.

term paper about taxation in the philippines

2. Too many goods and services are not being taxed. Principle of taxation : A good way to reduce high tax rates is to expand the tax base, or the set of goods and services which are taxed. The same (or even a larger) tax revenue can be collected as before by imposing a lower tax rate on as many goods and services as possible. The problem : In the Philippines, too many goods and services are exempted from taxes. For instance, our value-added tax (VAT) law has 59 lines of exemptions – more compared with the VAT laws of our neighbors. The plethora of exemptions partly explains the relatively low tax revenues we get. If only fewer goods were exempted – or if only the exemptions were limited to essential goods like raw food and medicines – then the government could boost its revenues.

5. Rich Filipinos are not paying their fair share of taxes. Principle of taxation : Finally, a good tax system levies more taxes to people who can afford to pay more. One way to do this is to make the rich pay for a larger fraction of their income than the poor; that is, by making the tax system “progressive.” The problem : The Philippine tax system is only “mildly” progressive, and even borderline “regressive” – in many instances, poor Filipinos effectively pay a larger fraction of their income in taxes. For example, tax rates on dividends and other forms of capital incomes (which are earned mostly by the rich) are so low compared to the tax rates of ordinary workers. Increasing these capital income tax rates will certainly help make the rich pay more in taxes. Also, taxes on petroleum products have been constant for many years. Aside from being a lost opportunity to combat pollution and congestion, it’s also a lost opportunity to tax the rich who consume petroleum products more.

Conclusion: The time is ripe for tax reform Tax policy is essentially a balancing act between efficiency and equity. We want to impose progressive taxes to make society a fairer place to live in. But at the same time, we want to make sure that such taxes do not reduce economic activity so much. Unfortunately, the Philippine tax system is currently deficient in both respects. Not only do our taxes disproportionately burden the poor and benefit the rich, but they also yield too little revenue given the distortions they create. Needless to say, both problems need to be resolved soon. Comprehensive tax reform in the country is long overdue.

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What are Taxes & Taxation: A Guide to Understanding Taxes with Your Tax Tita

Quick Tax Info Box: Philippines Edition

Taxation in a Nutshell: – The process where the government collects money (taxes) from people and businesses to fund public services. Key Nature of Taxation: – Comprehensive and plenary, giving the government full authority to impose taxes for national needs. Taxes Defined: – Mandatory contributions by individuals and businesses, based on income or property value, to support government functions and public services..

Let’s Talk About Taxes and Taxation

Hey, there!

First off, a big virtual hug to everyone navigating the labyrinth of Philippine taxation.

Trust me, adulting is hard, and understanding taxes? Even harder.

But as your Tax Tita, I’m here to sprinkle some clarity amidst the cloud of confusion.

Let’s deep-dive, shall we?

Definition of Taxation (because, let’s get our terms straight!):

“Taxation is the act of levying a tax. It is the process or means by which the sovereign, through its law-making body, raises revenue to defray the necessary expenses of the government.”

Unpacking The Jargon: Taxation 101

1. “the act of levying a tax”:.

This is basically the government saying, “Hey, we need some funds, so we’re setting this particular tax.” Think of it like being charged an extra fee for a VIP concert ticket. It’s the cost of enjoying the show!

Imagine going shopping in one of our countless malls, and you see that adorable top or those killer heels with an added amount on the price tag. That’s kind of like how our government “adds” or sets a specific tax amount on certain goods or our incomes.

For the Titas in Training: It’s like that extra 20% you pay on top of your spa day. Only, this 20% goes to the government.

Another Example: Our beloved Philippines might decide that for us to have cleaner streets, there’s a need for a tiny environmental tax on certain products. So, next time you see a slightly higher price tag on a plastic bottle, remember: it’s for Mother Earth!

2. “The process or means”:

Okay, so now that the tax is set, how do we get it from your wallets to the government’s coffers? This is the method or way they do it.

It’s not just slapping on an extra amount. There’s a whole system behind it! This talks about how the government collects this amount.

Life Analogy: Think of it as your BFF borrowing money. She doesn’t just take it; there’s a promise (or a Pinky Swear ) to return it, maybe through monthly brunch treats!

Example: Remember that time you got your first salary and wondered why a chunk was missing? Yep, that’s our friend, the withholding tax. Straight from your paycheck to the government!

3. “By which the sovereign, through its law-making body”:

When we say “sovereign” , picture the Philippines as a person. She’s the boss, the queen, the main character. And her trusty sidekicks? The lawmakers in our Congress and Senate . They decide the tax rules.

Example: It’s like our very own Philippine version of a K-drama where Congress and The Senate writes the script, and we, the citizens, act it out. Cue dramatic music.

4. “Raises revenue”:

Raises Revenue is a fancy word for collecting money. This is basically our government’s version of a paycheck. In simple terms? It’s all about collecting that money. And trust me, in a country of islands as beautiful as ours, there are a lot of expenses to cover.

Chika Time: It’s like pooling funds for that epic barkada beach trip—only this is for roads, schools, and hospitals.

Example: Ever been to Luneta Park and marveled at its beauty? The maintenance, the events, the lovely lights during holidays—all funded by our tax pesos.

5. “To defray the necessary expenses of the government”:

All this collected money? It’s not for a wild party.

It’s for the essential stuff —hospitals, roads, schools, and all the things that make our Philippines run smoothly.

Imagine having a huge group potluck. Everyone chips in, brings a dish (or cash for the lazy ones like me ), and at the end of the day, we all get to enjoy a grand feast.

Example: From the school in your barangay, the public hospital in your city, to the bridge being constructed nearby—all these are our tax pesos at work!

Nature and Scope of the Power of Taxation

We chatted about what taxation is above.

Now, let’s dive into its nature and scope.

Sounds fancy, right? But just like that 10-step skincare routine we all tried last summer (guilty ), each element has its role.

Let’s decode!

Nature and Scope of the Power of Taxation:

“The power of taxation is comprehensive, plenary, unlimited, and supreme. It is essentially legislative in character and is inherent in the state.”

1.”Comprehensive”:

This basically means our government’s taxing power covers a LOT. From that cute pair of shoes you bought online to the income of big tech companies, they can potentially tax it all.

Example: Remember the time you decided to start a small online business during the lockdown and realized you had to register it? Yep, the government’s reach is pretty much everywhere.

2.”Plenary”:

This is just a fancy term meaning ‘full and complete’. When it comes to deciding what, how, and when to tax, the Philippines is pretty much its own boss.

Example: If the government suddenly wanted to impose a tax on specifically our favorite milk tea (oh, the horror! ) for health reasons, it has the full power to do so.

3. “Unlimited and supreme”:

These two words emphasize just how dominant the power of taxation is. There’s no putting a leash on it! It’s like how your favorite teleserye lead has ultimate sway in the plotline.

Example: The government can decide to adjust tax rates or introduce new ones based on what it deems necessary. Remember the TRAIN law? That’s the government flexing its unlimited power.

4.”Essentially legislative in character”:

This means the big decisions regarding taxes are made by our lawmakers. Yep, those guys and gals in fancy suits we voted into office!(I just sincerely hope they understand what the lifeblood doctrine is!)

Example: Before any tax reform becomes law, it has to pass through both houses of Congress and the Senate and get the president’s approval. So, it’s a whole team effort!

5.”Inherent in the state”:

This simply means that the power to tax is a natural part of being a government. Like how posting OOTDs is inherent to being a fashion blogger, taxation is innate to governance.

Example: Just as rice is a staple in every Pinoy meal, taxation is an essential part of how every country operates.

Definition of Taxes :

“Enforced proportional contributions levied by the state’s law-making body by virtue of its sovereignty upon the persons or properties within its jurisdiction for the support of the government and all its public needs.”

Demystifying Taxes: Let’s Dive Deeper!

1.”enforced proportional contributions”:.

At its core, taxes aren’t voluntary donations. They’re mandated, but they’re based on a certain proportion or scale. It’s like when our barkada decides on a fixed contribution for a beach trip. The more luxury you want, the more you contribute.

Example: If Juan earns more than Pedro, Juan will pay a higher amount of income tax, because it’s proportional to his earnings.

2.”Levied by the state’s law-making body”:

This emphasizes that our taxes are set by official bodies – think Congress or the Senate. It’s not just any Juan (pun intended) deciding the amounts!

Example: When the TRAIN law was passed, it was our elected officials in the Congress and Senate who discussed, debated, and decided its provisions.

3.”By virtue of its sovereignty”:

This means that because our Philippines is an independent and sovereign state, it has the full right to set and collect taxes.

Example: It’s like when you’re the queen bee of your squad. You decide the theme for your birthday bash because, well, it’s your party!

4.”Upon the persons or properties within its jurisdiction”:

Basically, if you’re living, working, or owning property here, expect the taxman’s knock. Our islands, our rules!

Example: If you bought a condo unit in Makati or opened a sari-sari store in Cebu, you’re within the Philippine jurisdiction and will need to abide by our tax regulations.

5.”For the support of the government and all its public needs”:

This is the WHY . We pay taxes so that our government can run smoothly and provide us with public services.

Example: Every time you drive on NLEX or see a public school being built, know that our tax pesos are hard at work!

To Wrap Up Taxes and Taxation Jargon:

Are taxes and taxation complicated.

Taxes might sound complicated, like trying to understand the ending of a Filipino telenovela, but it’s all about the communal spirit.

We contribute a bit, and in return, we get roads to drive on, schools to learn in, and hospitals for when we eat one too many chicharons.

Think of taxes like the membership fee to the exclusive club that is the Philippines.

We all chip in, and in return, we get to enjoy the amenities, services, and beauty of our home country. And while we might grumble about those deductions now and then, just remember: Every peso has the potential to make our nation even more fabulous.

Got thoughts or just want to share your latest “I survived tax season” selfie? Hit me up below! Remember, the best way to navigate adulting is to do it together, one tax query at a time.

And as Your Tax Tita always says:

“In the world of taxes, just like in love, every contribution matters – small or big, it’s all about giving your share to build something beautiful together. #TaxHugotWithYourTaxTita Your Tax tita

Marie is the knowledgeable voice behind Tax Maven Ph, a trusted Philippine blog simplifying tax matters for individuals and businesses. As a Certified Public Accountant with extensive experience at the country's premier tax collecting agency, Marie shares her expertise on various tax topics, demystifying tax laws and helping readers navigate the tax system with confidence. Stay informed and gain valuable insights by connecting with Marie through Tax Maven Ph, your go-to resource for navigating the complexities of the Philippine tax system.

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Taxes in the Philippines [Taxation Guide for 2024]

Last Updated – Oct 23, 2023 @ 1:35 pm

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:

Tax Assessment

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.

Tax collection

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.

This certificate is required for various transactions such as registering a new business , renewing business permits, applying for travel visas , and more.

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.

This income can come from various sources, such as your job , business , investments , or any other financial activities.

Types of Taxes in the Philippines

To understand taxation, it’s essential to know the different types of taxes imposed by the government.

Direct taxes

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.

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%.

Withholding tax

The following are the different withholding taxes you should know.

When a resident company distributes dividends, they are liable to the following taxes.

For individuals:

For corporations:

For interest payments made to non-residents, a 20% withholding tax applies, unless a tax treaty specifies otherwise.

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.

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.

Capital Gains Tax

This is levied on the profit (capital gains) earned from the sale or disposal of certain types of assets, such as real estate , stocks , bonds , mutual funds , and other investments.

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.

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.

Related: How to Write a Last Will and Testament

Donor’s Tax

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.

Indirect taxes

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.

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.

Local Taxes

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.

Business Tax

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.

Franchise 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.

Professional Tax

Professionals who are required to pass government exams are obligated to pay an annual professional tax.

Amusement 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.

Community Tax

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.

Barangay Clearance

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

Consider low-cost index funds under ETFs and Mutual Funds , as they minimize trading activity and offer lower taxation.

ETFs in particular are very tax-efficient since you will be only taxed when you sell your shares. This helps you enjoy tax deferral.

Tax-Managed Fund

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:

Exempt Gift

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.

Related: Top Accounting Firms in the Philippines

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.

About MJ de Castro

MJ de Castro is the lead personal finance columnist at Grit PH.

MJ started her career as a writer for her local government’s City Information Office. Later on, she became a news anchor on PTV Davao del Norte.

Wanting to break free from the shackles of her 9-to-5 career to live by the beach, she pursued remote work. Over the years, she has developed a wide specialization on health, financial literacy, entrepreneurship, branding, and travel.

Now, she juggles writing professionally, her business centering on women’s menstrual health, and surfing.

Education: Ateneo de Davao University (AB Mass Communication) Focus: Personal Finance, Personal Development, Entrepreneurship, & Marketing

Reader Interactions

Tax Controversy 2023

Philippines, law and practice.

SyCip Salazar Hernandez & Gatmaitan is a full-service law firm and one of the largest in the Philippines. The firm’s tax department consists of 34 lawyers (14 partners, one of counsel, one special counsel and 18 associates), a half of whom are certified public accountants, and is headed by Ms Carina C. Laforteza, who is a partner and a certified public accountant. SyCipLaw’s tax department provides the entire range of tax services, from advising on, and structuring, the tax aspects of corporate transactions to administrative and judicial litigation in relation to tax refunds and defending clients against assessments for national and local taxes and customs duties, including in respect of safeguarding measures cases before the Department of Trade and Industry and the Tariff Commission. The firm also assists its corporate clients in obtaining rulings and with compliance requirements.

1. Tax Controversies

1.1 tax controversies in this jurisdiction.

The Philippines practises self-assessment, wherein the taxpayer determines the tax liability, files the tax returns and pays the taxes due. Proper tax administration, however, cannot rely on voluntary compliance alone. Thus, several measures are in place to facilitate the taxpayer’s compliance with the tax laws, such as the extensive investigatory powers granted to tax authorities. To check the correctness of taxes remitted to the government, tax authorities are authorised to examine the taxpayer’s returns and related documents.

Tax controversies in the Philippines are generally the result of regular tax audits/investigations conducted by:

the Bureau of Internal Revenue (BIR) for national taxes under the National Internal Revenue Code of 1997, as amended (Tax Code);
the Bureau of Customs (BOC) for tariff and customs duties; and
local government units (LGUs) for local taxes, which include local business taxes and real property taxes (RPT).

A tax controversy arises when the authorities issue an assessment for tax deficiencies and the taxpayer disputes that assessment.

Tax controversies may also arise from the following:

premature issuance of warrants that authorise the BIR to attach the taxpayer’s real and personal properties, even if the tax assessment is not yet final;
assessments for customs duties and taxes arising from the tariff classification and valuation of imported products;
claims for refund by the taxpayer involving erroneously or illegally collected taxes, excess creditable taxes withheld, and excess unutilised input taxes;
requests for a ruling on the tax implications of a certain transaction (eg, tax treaty relief applications and requests for tax-free exchange rulings);
court decisions, which finally resolve and confirm the taxability of certain transactions – these may lead to tax audits of taxpayers with similar transactions, or of those belonging to the same industry or industries where such transactions are common;
complaints, confidential information filed by informers, or referrals from other government agencies, which may result in the investigation and prosecution of criminal tax cases under the BIR’s Run After Tax Evaders (RATE) programme; and
petitions filed by taxpayers to assail the validity of a tax statute, local tax ordinance of LGUs or regulations issued by the BIR or BOC.

1.2 Causes of Tax Controversies

For national taxes, most tax controversies involve corporate income tax, withholding tax and value-added tax (VAT). This is due mainly to the taxpayer’s poor tax compliance system and inadequate documentation or lack of supporting records. Deficiency assessments on corporate income tax usually come from conflicting interpretations of law or tax regulations or differing tax positions on a complex transaction. Withholding tax deficiencies are commonly due to differences of opinion on the applicable withholding tax rates and discrepancies over the amount of certain expenses reported in the financial statements (FS) or tax returns as against the alphabetical list of income payees (which contains the amounts paid to these payees and the taxes withheld). VAT controversies normally arise from non-compliance with the proper invoicing requirements for VAT zero-rated sales.

For local taxes, the typical tax controversy involves RPT, where there is a dispute over the property classification and assessment level. Some LGUs also continue to impose local taxes on export-oriented companies and other companies entitled to tax incentives.

1.3 Avoidance of Tax Controversies

A controversy involving national taxes is mitigated by securing a confirmatory ruling from the BIR regarding the tax implications of a transaction.

Other ways to mitigate tax controversies include:

seeking tax advice or opinion on a transaction, especially when it involves a novel tax issue, difficult interpretation of tax laws or conflicting positions due to its complexity;
engaging an external adviser to conduct tax due diligence; and
maintaining a robust tax compliance system.

1.4 Efforts to Combat Tax Avoidance

The Philippines has not fully adopted the Organisation for Economic Co-operation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) Recommendations, nor the European Union (EU)’s recent measures to combat tax avoidance.

1.5 Additional Tax Assessments

When the BIR assesses a taxpayer for tax deficiencies, it will issue a final assessment notice/formal letter of demand (FAN/FLD), requiring the taxpayer to pay the assessed taxes within 30 days from the date of demand. If the taxpayer agrees, it can immediately pay the assessed taxes. However, if the taxpayer disagrees with the assessment, the taxpayer must file a protest within 30 days from receipt of the demand. The protest must contain the taxpayer’s factual and legal bases for disputing the tax assessment, together with supporting documents. The taxpayer is not required to pay the amount of deficient taxes due while the tax assessment is under protest. However, interest on the tax deficiency tax will continue to accumulate until the full amount of tax is paid.

Generally, the CIR’s decision or inaction on the protest may be elevated to the Court of Tax Appeals (CTA) without payment of the disputed tax. Nonetheless, the BIR may still enforce collection against the taxpayer, unless collection is suspended by the CTA.

The rule is different in the case of RPT (a local tax) because the taxpayer must pay the RPT due before filing a protest.

Under the Customs Modernisation and Tariff Act (CMTA), the BOC shall assess the duties and taxes on imported goods. If the importer disputes the assessment, such shall be completed upon either final readjustment based on the tariff ruling in the case of a classification dispute, or final resolution of the protest case involving valuation, rules of origin, and other customs issues. In the absence of fraud and when the goods have been finally assessed and released, the assessment shall be conclusive three years from the date of final payment of duties and taxes, or upon completion of the post-clearance audit. Decisions of the BOC Commissioner may be appealed to the CTA.

2. Tax Audits

2.1 main rules determining tax audits.

Revenue Memorandum Order (RMO) 19-2015, as amended by RMO 64-2016, prescribes the procedures to be observed during a tax audit. It classifies those that are subject to tax audits as follows:

mandatory cases including claims for tax refund, tax clearance and estate tax returns;
priority taxpayers/industries such as taxpayers with zero-rated sales, taxpayers enjoying tax exemptions/incentives and those whose compliance is below the established benchmark rate; and
other priority audits identified by the BIR.

RMO 19-2015 also provides that taxpayers who have not been audited but have been in operation for more than three years are subject to a mandatory tax audit. Meanwhile, those that have been subject to a tax audit for two successive taxable years will no longer be subject to tax audit, unless there is a presumption of a tax fraud (ie, understatement of sales/income, or overstatement of expenses/deductions by at least 30%).

2.2 Initiation and Duration of a Tax Audit

Under the Tax Code, the BIR has the authority to assess internal revenue taxes within three years after the last day prescribed by law for the filing of the return or the actual date of filing, whichever is later. In exceptional cases (ie, false/fraudulent return with intent to evade tax or failure to file a return), the BIR may assess the taxpayer at any time within ten years after discovery of the falsity, fraud or omission.

While the law does not limit the duration of the tax audit, as long as it is conducted within the three-year prescriptive period, RMO 19-2015 requires the BIR examiners to strictly comply with the prescribed periods for completion of their audits. BIR examiners are given an internal deadline of 180 days (for non-large taxpayers) or 240 days (for large taxpayers) from the issuance of the letter of authority (LOA) to submit their report.

Generally, tax audits do not suspend the prescriptive period except for the following instances:

when the BIR is prohibited from making the assessment and for 60 days thereafter;
when the taxpayer requests a reinvestigation which is granted by the CIR;
when the taxpayer cannot be located at the address given in the tax return filed, upon which a tax is being assessed/collected; and
when the taxpayer is out of the Philippines.

The prescriptive period is also suspended when the taxpayer agrees, in writing, to waive such period.

Meanwhile, the BOC may conduct an audit examination, inspection, verification, and investigation of records pertaining to any goods declaration for the purpose of ascertaining the correctness of that goods declaration and determining the liability of the importer for duties, taxes and other charges, including any fine or penalty, within three years from the final payment date of duties and taxes or customs clearance.

2.3 Location and Procedure of Tax Audits

Generally, tax audits are conducted in the business premises of the taxpayer during business hours. The BIR examiners usually request copies of tax returns, invoices and official receipts, journal vouchers, ledgers and other accounting books and records. Tax returns, invoices and official receipts are based on printed documents, while books of accounts and accounting records can be made available electronically or in a spreadsheet format.

2.4 Areas of Special Attention in Tax Audits

Tax auditors should check the authority of the assigned BIR examiners and the validity of the LOA issued to the taxpayer. A taxpayer may validly refuse a request for examination by any revenue officer not mentioned in the LOA. Tax auditors must ensure that the BIR examiners’ power to conduct the tax audit has not lapsed or does not go beyond the scope of the LOA.

The BIR typically examines the completeness and timeliness of a taxpayer’s filings; furthermore, it is likely that the BIR will compare the FS, tax returns and other documents to spot discrepancies between the amounts reported/disclosed (eg, sales in the FS as opposed to sales reported in the alphabetical list). The discrepancies noted will become the basis of any tax deficiency assessment.

2.5 Impact of Rules Concerning Cross-Border Exchanges of Information and Mutual Assistance Between Tax Authorities on Tax Audits

The prevalence of rules concerning cross-border exchanges of information and mutual assistance between tax authorities has contributed to an increase, though not a significant one yet, in tax audits in the Philippines.

Republic Act No 10021 (the Exchange of Information on Tax Matters Act) allows the exchange of information by the BIR on tax matters according to internationally agreed tax standards. Under the law, the CIR is authorised to inquire into the taxpayer’s bank deposits and other related information held by financial institutions, and to respond to a request from a foreign tax authority, pursuant to a tax treaty to which the Philippines is a party. Furthermore, income tax returns of the taxpayer subject of an exchange of information request shall be open to inspection, upon the order of the President of the Philippines.

We have not experienced, or are not aware of, any joint tax audits conducted by the BIR with the tax authority of another state.

2.6 Strategic Points for Consideration During Tax Audits

Familiarity With the Tax Treatments of Accounts and Transactions

Taxpayers should be familiar with the tax treatment of all their material accounts, entries and transactions. It would be helpful if these tax treatments were documented through company policies or supported by the opinion of a tax expert.

Prepare Tax Documents and Other Supporting Documents in Advance

In tax audits, the tax authorities will request all relevant tax returns, accounting records and other documents. Since the BIR usually requests the same set of documents, the taxpayer can prepare the documents for a given year in anticipation of a tax audit. Having complete documents not only gives the impression that the taxpayer is prima facie compliant with all its tax filings and reporting obligations, but also facilitates the conduct of the audit. It is also helpful if the taxpayer can provide a reconciliation of the usual discrepancies the BIR examiners note in their findings. Accordingly, the taxpayer can easily explain the reason for any discrepancies thereby preventing the discrepancy from giving rise to a deficiency assessment.

Designate a Contact Person for the Tax Authorities

To ensure a smooth audit, the taxpayer should designate a responsible employee to co-ordinate with the tax authorities on their document requests and to handle the overall conduct of the tax audit.

Engage an External Tax Adviser

It is prudent to engage an external tax adviser to handle the tax audit who can help prepare the factual and legal arguments and ensure that the rights of the taxpayer are adequately protected. An external adviser may also be consulted on major legal issues and possible questions from the tax examiner during the audit.

3. Administrative Litigation

3.1 administrative claim phase.

When attempting to refute or protest an assessment by the tax authorities, the administrative phase is mandatory and must be concluded before proceeding to the judicial phase.

Letter of Authority (LOA)

The issuance of an LOA signifies the start of a tax assessment. The LOA is issued to authorise a BIR examiner to conduct a tax audit. It must specify the type of taxes that will be examined and the taxable year subject of the audit.

Tax Audit Proper

After the issuance of the LOA, the BIR examiners can request and examine the tax returns, books of accounts and accounting records, official receipts, invoices, and other relevant documents necessary for the tax audit.

Notice of Discrepancy (NOD)

Upon audit, the BIR examiners will submit their initial report containing findings of discrepancies. Based on the report, the taxpayer shall be informed in writing of the discrepancies for the discussion of discrepancy (Discussion).

The taxpayer may present its side and explain the discrepancy during the Discussion, which must not extend beyond 30 days from receipt of the NOD. The taxpayer must also submit all the necessary supporting documents within the 30-day period. Failure by the taxpayer to appear without prior notice is tantamount to a waiver of its right to a Discussion. If the taxpayer does not agree with the BIR’s findings, or if the BIR finds that the taxpayer is still liable for tax deficiencies, the case will be endorsed for issuance of a PAN within ten days from the conclusion of the Discussion.

Preliminary Assessment Notice (PAN)

The PAN contains the proposed deficiency tax assessment along with its factual and legal bases. The taxpayer may file a reply to the PAN within 15 days from receipt, containing the taxpayer’s factual and legal bases in disputing the PAN, and supporting documents.

Final Assessment Notice and Formal Letter of Demand (FAN/FLD)

The BIR will review the taxpayer’s reply to the PAN. If the BIR does not accept the taxpayer’s explanation, it will issue the FAN/FLD, which must be done within the three-year prescriptive period, and in exceptional cases, within ten years. Otherwise, the BIR’s right to assess will be barred by prescription. Usually, the FAN/FLD is only a reiteration of the findings in the PAN with adjustments on the amount of interest.

If the taxpayer does not agree with the BIR’s findings, it must file a protest within 30 days from receipt of the FAN/FLD. A protest may be in the form of a request for reconsideration or for reinvestigation. In case of a request for reinvestigation, the taxpayer must submit additional supporting documents within 60 days from the date of filing of the protest. If the taxpayer does not file a protest, the assessment becomes final and executory.

Final Decision on Disputed Assessment (FDDA)

Based on the arguments in the protest and the supporting documents, the BIR will decide whether to grant or deny (in whole or in part) the protest, which decision will be embodied in an FDDA. The taxpayer may appeal the FDDA administratively through a motion for reconsideration before the CIR, or judicially through an appeal before the CTA.

Administrative Claim Phase in BOC

Depending on the issue involved (eg, refund, abandonment, valuation rules or origin issues), decisions of the Port Office, or of the BOC Commissioner, may be appealed administratively and/or judicially within the corresponding period prescribed under the CMTA and its implementing rules.

3.2 Deadline for Administrative Claims

There is no mandatory deadline given to tax authorities to decide a protest lodged by a taxpayer.

For national taxes, the CIR is given 180 days from receipt or, in case of a request for reinvestigation, from receipt of the supporting documents to decide on the protest. If a decision is received during this period, the taxpayer has 30 days from receipt of the BIR’s decision within which to appeal to the CTA.

However, in the case of CIR’s inaction, the taxpayer has the option to file an appeal before the CTA within 30 days from the lapse of the 180-day period or to wait for the CIR’s decision and then appeal it within 30 days from receipt of that decision.

Different periods are provided in the case of refunds of national taxes and protests against, and refunds of, local taxes.

4. Judicial Litigation: First Instance

4.1 initiation of judicial tax litigation.

Judicial tax litigation is initiated by filing a petition for review (petition) with the CTA to appeal:

the CIR’s decision or inaction on disputed assessments involving national internal revenue taxes;
the BOC Commissioner’s decision in cases involving liability for customs duties; or
the Central Board of Assessment Appeals (CBAA)’s decision in the exercise of its appellate jurisdiction over cases involving the RPT assessments originally decided by the provincial or city board of assessment appeals.

Judicial tax litigation may also be initiated by filing a complaint before the regional trial courts (RTC) in respect of local taxes originally decided by the local treasurer of the respective LGUs.

4.2 Procedure of Judicial Tax Litigation

The CTA adopted certain provisions under the 2019 Amendments to the 1997 Rules of Civil Procedure, pursuant to CTA En Banc Resolution 9-2020. Other provisions that were not specifically adopted shall apply supplementarily.

After the filing of a petition and payment of docket fees, summons will be served to the respondent (eg, BIR), requiring it to file an answer within 30 calendar days after service of the summons, which period may be extended for another 30 days. The answer must include all of the claims/defences, legal bases, and grounds for dismissal of the petition (if any).

After the BIR files an answer, the case will be set for pre-trial not later than 60 days from the filing of the last responsive pleading. The parties must submit their respective pre-trial briefs at least three calendar days before the pre-trial.

During the pre-trial conference (PTC), the parties, through counsel, may stipulate on facts, determine the issues to be resolved and identify the evidence to be presented during trial. After the PTC, the CTA will issue a pre-trial order reciting the matters covered during the PTC. The order shall bind the parties, limit the trial to matters not disposed of and control the course of the trial, unless modified by the CTA to prevent injustice.

Thereafter, trial hearings will be conducted by the CTA for the presentation of the parties’ respective evidence. Upon completion, the CTA will direct the parties to file their respective memoranda, which summarise the parties’ claims, arguments and defences. The CTA Division will decide on the issues based on the evidence presented during trial.

4.3 Relevance of Evidence in Judicial Tax Litigation

Testimonial and documentary evidence are important considering that judicial claims before the CTA are litigated de novo and decided based on what has been presented and formally offered by the parties (and admitted by the CTA) during the trial.

The documents or exhibits to be presented, their purpose, and the numbers and names of witnesses, are identified as early as during the PTC. However, testamentary and documentary evidence will still need to be presented and marked before the CTA during the course of the trial hearings.

The testimonies of the witnesses will be presented pursuant to the Judicial Affidavit Rule. The judicial affidavit contains the testimony of the witness in a question-and-answer format and is submitted in lieu of the direct testimony of the witness.

Under the CTA En Banc Resolution 9-2020, the taxpayer must submit all its evidence (eg, judicial affidavits and documentary evidence) upon filing of the Petition with the CTA. This is a significant change from the previous practice, wherein evidence was submitted only during the course of the PTC. Nevertheless, the CTA sometimes allows parties to introduce evidence that was not submitted together with the Petition, if a judicial affidavit (JA) containing the testimony of the witness and attaching the documentary evidence cited in the JA is submitted at least five days before the PTC.

4.4 Burden of Proof in Judicial Tax Litigation

Tax assessments are presumed to be correct and made in good faith. Thus, in order to overturn this presumption and avoid a decision in favour of the tax authority, the taxpayer must prove that the assessment has no legal or factual basis. Similarly, the claimant must prove all the elements required for a tax refund since refunds are construed strictly against the claimant and in favour of the state. In criminal tax litigation, the government is required to prove the accused’s guilt beyond reasonable doubt.

4.5 Strategic Options in Judicial Tax Litigation

Timing to Produce Documents

Under the revised rules of the CTA, all pieces of evidence, including the judicial affidavits of witnesses, must be submitted upon filing of the petition or answer with the CTA.

In cases where the dispute involves mostly factual issues, it is important for the taxpayer to determine, as early as possible, the quantity and quality of evidence that is available or that can be produced to support its position. Note that judicial claims are decided based on what has been presented and formally offered by the parties during the trial, and while the allegations by the taxpayer may be factually correct, mere allegations without proof cannot be given weight by the courts, unless they can be subject to judicial notice.

Legal Arguments

Tax disputes normally arise from conflicting interpretations of a legal provision. Thus, it is critical for the taxpayer and its tax adviser, who may or may not be the litigating lawyer, to conduct comprehensive research to determine the probability of obtaining a favourable ruling.

Possibility of Settlement

The CTA rules provide for referral to mediation and entering into a compromise agreement if both parties are willing to settle the case out of court. The taxpayer, in determining whether to settle, must evaluate not only the strength of its arguments, but also practical considerations such as litigation costs, duration of court proceedings, potential benefit it may gain should the case be decided in its favour and whether an early settlement outweighs all the costs already incurred.

Expert Reports

A party who desires to introduce voluminous documents/long accounts into evidence must, with the CTA’s prior approval, refer the voluminous documents to an independent Certified Public Accountant who will review, as a court-appointed commissioner, the source documents or other financial records, and render a summary report.

It is also possible to obtain testimony from an expert on certain issues that have an impact on the tax treatment.

4.6 Relevance of Jurisprudence and Guidelines to Judicial Tax Litigation

Court decisions are based primarily on tax laws and regulations. Judicial decisions applying or interpreting the laws form a part of the legal system of the Philippines. However, only decisions of the Supreme Court establish jurisprudence and are binding on all other courts. Nonetheless, since the Tax Code originated in US tax law, older decisions of US courts in tax cases are, although not binding, persuasive.

In cases where there is no established precedent, or where the case involves international tax issues, the local courts may find foreign jurisprudence and international guidelines (eg, OECD guidelines) persuasive in the interpretation of tax treaties and in the resolution of the tax issue at hand. However, these foreign authorities, while persuasive, are not binding on local courts.

5. Judicial Litigation: Appeals

5.1 system for appealing judicial tax litigation.

The judicial phase of tax litigation consists of several levels of review.

A taxpayer may seek judicial relief if its protest was denied, whether fully or partially, by the CIR. Upon issuance of the FDDA, the taxpayer may opt to appeal administratively to the CIR or to elevate its appeal to the CTA, through filing a Petition.

The CTA is a highly specialised court that reviews cases involving tax issues. There are two levels of review at the CTA: CTA Divisions and CTA En Banc.

The appealed decision of the CIR will be tried and resolved by the CTA Division. In the case of an unfavourable ruling, the taxpayer may file a motion for reconsideration (MR) or a motion for new trial (MNT) before the same CTA Division. The resolution of the CTA Division on the MR or MNT may be appealed through a Petition with the CTA En Banc. Lastly, the decision of the CTA En Banc may be appealed to the Supreme Court through a petition for review on certiorari.

For local taxes originally decided by the local treasurer of the respective LGUs, an appeal of the local treasurer’s decision may be made through filing a complaint before the RTC having jurisdiction over the taxpayer’s place of business.

Cases involving RPT go through the Local Board of Assessment Appeals and the CBAA before they are appealed to the CTA En Banc.

5.2 Stages in the Tax Appeal Procedure

Petition for Review (CTA Division)

For cases under CTA’s exclusive appellate jurisdiction, such as CIR’s decision involving disputed assessments, the taxpayer files an appeal by filing a petition before the CTA. The Petition must be filed within 30 days from receipt of the FDDA or CIR’s denial of the taxpayer’s MR. In cases where a taxpayer elevates the FDDA to the CIR by filing an MR, it is crucial to determine whether subsequent actions by the BIR will be viewed as a denial of the MR. In a recent case, the Supreme Court clarified that the Preliminary Collection Letter, the Final Notice Before Seizure, the Warrant of Distraint and/or Levy issued while the administrative appeal is pending are not final decisions on the appeal to the CIR and the taxpayer may opt to wait for the CIR’s decision.

The CTA Division will then hear and resolve the case based on the issues presented and evidence submitted by the parties.

Motion for Reconsideration or New Trial (CTA Division)

Once a decision is promulgated, an aggrieved party may file an MR or MNT before the same CTA Division. Otherwise, the decision of the CTA Division becomes final and executory.

The CTA Division may grant or deny, whether fully or partially, the MR or MNT based on the merits and the arguments of the parties.

Petition for Review (CTA En Banc)

The CTA Division’s resolution on the MR or MNT may be appealed by filing a Petition with the CTA En Banc within 15 days from receipt of the resolution. Otherwise, the resolution of the CTA Division becomes final and executory.

The CTA En Banc may sustain, reverse or modify the CTA Division’s decision. The aggrieved party may file an MR before the CTA En Banc within 15 days from receipt of the adverse decision. If no MR is filed before the CTA En Banc, the decision shall become final and executory.

Petition for Review on Certiorari (Supreme Court)

The aggrieved party may appeal the decision of the CTA En Banc to the Supreme Court by filing a petition for review on certiorari within 30 days from receipt of the decision. The aggrieved party may file an MR of the decision before the Supreme Court within 15 days from receipt of the adverse decision. Upon finality of the decision by the Supreme Court, the tax assessment becomes final and executory.

5.3 Judges and Decisions in Tax Appeals

Court of Tax Appeals

The CTA is composed of a Presiding Justice and eight Associate Justices appointed by the President of the Philippines. The CTA may sit En Banc, or in three divisions comprised of three justices each, including the Presiding Justice, who shall be the Chairman of the First Division.

Cases in divisions are heard and decided upon by three CTA justices sitting as one body. The affirmative votes of at least two CTA justices are required for the rendition of a decision/resolution.

Cases in CTA En Banc are decided by the eight Associate Justices and the Presiding Justice sitting as one body. The affirmative votes of at least five justices shall be necessary for the rendition of a decision/resolution. If a majority vote is not reached, the petition or motion shall be dismissed or denied.

Supreme Court

The Philippine Supreme Court is composed of a Chief Justice and 14 Associate Justices, who are appointed by the President of the Philippines. The Supreme Court may sit En Banc or in one of its three divisions composed of five members each.

6. Alternative Dispute Resolution (ADR) Mechanisms

6.1 mechanisms for tax-related adr in this jurisdiction.

Under the CTA guidelines, the CTA may refer cases to mediation. However, not all cases may be referred to mediation (eg, criminal tax cases and those cases where there is already a final and executory decision).

6.2 Settlement of Tax Disputes by Means of ADR

The parties will be required to appear before a mediator to determine their willingness to enter into mediation. If one party objects, the mediation proceedings will be terminated and the CTA proceedings will continue.

If both parties are willing to enter into mediation, they will be asked to execute an agreement to mediate and proceed with mediation. The parties have 30 days, extendible for another 30 days, to reach a compromise agreement. A successful mediation may result in either a full compromise, which would terminate the CTA proceedings, or a partial compromise, wherein CTA proceedings on the remaining issues would continue.

6.3 Agreements to Reduce Tax Assessments, Interest or Penalties

Mediation allows the party and the BIR to enter into a settlement which may entail a reduction of the amount of tax assessed, including any surcharge, interest and penalties. In mediation, the BIR is still bound by substantive law, particularly Section 204 of the Tax Code, which provides for a compromise settlement of 40% or 10% of the basic tax assessed based on doubtful validity of the assessment or financial incapacity, respectively. In the latter case, the taxpayer is required to prove its financial incapacity through supporting facts and documents. A settlement offer less than the prescribed minimum rates would still be subject to the approval of the evaluation board composed of the CIR and the four deputy commissioners.

Aside from court-annexed mediation, the BIR assessment may be settled by administrative compromise/abatement. Under the Tax Code, the CIR may compromise over tax payments when:

reasonable doubt exists as to the validity of the claim against the taxpayer; or
the taxpayer’s financial position demonstrates a clear inability to pay the assessed tax.

In cases of financial incapacity, the minimum compromise rate is equivalent to 10% of the basic assessed tax, while for all other cases, the minimum compromise rate is 40%.

The CIR may also abate or cancel the entire amount or portion of unpaid tax liability if the assessment is excessive or if the administration costs involved are not justified by the collection of the amount due.

6.4 Avoiding Disputes by Means of Binding Advance Information and Ruling Requests

A revocation, modification or reversal of a BIR ruling shall not be given retroactive application if it will prejudice the taxpayer. In this sense, confirmatory tax rulings issued by the tax authority are binding against the BIR, but only in relation to the taxpayer who originally applied for that ruling, the specific transaction involved, and the taxes that were the subject of the ruling. Moreover, since the ruling is issued by the BIR based on facts represented by the taxpayer, if the BIR subsequently finds that the facts represented are different from the actual ones, the ruling will be considered void and will not be binding against the BIR.

6.5 Further Particulars Concerning Tax ADR Mechanisms

In addition to the details discussed in 6.2 Settlement of Tax Disputes by Means of ADR , the following cases cannot be referred to mediation:

where the jurisdiction of the CTA, BIR, BOC, Secretary of Finance, Secretary of Trade and Industry, or Secretary of Agriculture is in issue;
where there is a pending application for a temporary restraining order or preliminary injunction for the suspension of collection of taxes;
cases arising from criminal offences within the jurisdiction of the CTA Division or En Banc;
the RTC’s decisions/resolutions/orders in tax collection cases involving final and executory assessments;
the RTC’s decisions/resolutions/orders in local tax cases;
the CBAA’s decisions over cases involving the assessment and taxation of real property; and
civil cases involving tax assessments that are final and executory.

6.6 Use of ADR in Transfer Pricing and Cases of Indirect Determination of Tax

The BIR has not yet strictly implemented the transfer pricing (TP) audit guidelines during a tax audit.

The TP regulations provide that the BIR and the taxpayer may enter into an advance pricing agreement (APA) to determine in advance an appropriate set of criteria for the determination of the transfer prices of controlled transactions over a fixed period. The APA aims to reduce the risk of TP examination and double taxation. However, the APA is not mandatory and is undertaken purely on a voluntary basis on the part of the taxpayer. As of writing, the BIR has not yet issued separate guidelines on the application of APAs.

7. Administrative and Criminal Tax Offences

7.1 interaction of tax assessments with tax infringements.

Failure to pay the correct taxes will not only result in an assessment for basic deficiency taxes but also in the imposition of civil penalties. Civil penalties include a 25% surcharge (50% in cases of wilful neglect to file the return or where a false or fraudulent is wilfully made) and interest on the unpaid amount of tax at the rate of double the legal interest rate.

Non-payment of taxes does not automatically give rise to a criminal offence, unless the circumstances of non-payment (eg, it is attended by fraud) constitute a separate criminal offence.

7.2 Relationship Between Administrative and Criminal Processes

When a criminal action is instituted, the civil action for collection of taxes is automatically instituted in that criminal action. However, an assessment is not necessary before a criminal case may be instituted, and a collection/assessment case does not automatically mean that a tax offence has been committed.

7.3 Initiation of Administrative Processes and Criminal Cases

Based on the findings in a regular tax audit, third-party information or other sources, a taxpayer may be the subject of a preliminary investigation for violation of the Tax Code before the Department of Justice (DOJ), which is the initial step in a criminal tax case.

Pursuant to the RATE programme, which is a joint programme of the BIR and DOJ, the BIR is mandated to investigate criminal violations of the Tax Code and assist in the prosecution of criminal cases.

7.4 Stages of Administrative Processes and Criminal Cases

Criminal tax cases are initially filed with the DOJ for determination of the existence of probable cause in a preliminary investigation. Upon a finding of the existence of probable cause, the case will be filed either at the RTC or the CTA, depending on the amount involved.

The RTC has original jurisdiction over criminal offences arising from violations of the Tax Code and other laws administered by the BIR or BOC, where the principal amount of taxes and fees claimed, exclusive of charges and penalties, is less than PHP1million (approximately USD20,000) or where there is no specified amount claimed. The CTA has original jurisdiction over criminal tax cases when the amount claimed is at least PHP1million.

7.5 Possibility of Fine Reductions

Upfront payment of the additional tax assessment does not result in the reduction of potential fines applicable to the tax offence. Furthermore, the payment of the tax due shall not constitute a valid defence in any prosecution for violations of the Tax Code.

7.6 Possibility of Agreements to Prevent Trial

Payment of the assessed tax does not prevent or stop a criminal tax trial. Criminal cases already filed in court and those involving tax fraud may not be compromised.

During the administrative phase of the tax assessment, compromise penalties are imposed and collected by the BIR against the taxpayer, in lieu of criminal prosecution for violations committed by the taxpayer (see 6.3 Agreements to Reduce Tax Assessments, Interest or Penalties ). However, certain violations, such as tax evasion and declarations under penalties of perjury, may not be compromised.

7.7 Appeals Against Criminal Tax Decisions

Rule 9 of the CTA rules sets out the following procedures for appeals.

Notice of Appeal

An appeal to the CTA En Banc in criminal cases decided by the RTC in the exercise of its original jurisdiction shall be made by filing a notice of appeal within 15 days from receipt of a copy of the decision or final order with the court which rendered the final judgment or order appealed from and by serving a copy upon the adverse party.

Petition for Review

An appeal to the CTA En Banc in criminal cases decided by the CTA Division shall be taken by filing a petition within 15 days from receipt of the decision or resolution appealed from. The CTA may, for good cause, extend the time for filing of the Petition for an additional period not exceeding 15 days.

An appeal to the CTA En Banc in criminal cases decided by the RTC in the exercise of their appellate jurisdiction shall be taken by filing a petition within 15 days from receipt of the decision/final order appealed from.

Petition for Review on Certiorari

An appeal to the Supreme Court in criminal cases decided by the CTA En Banc shall be made by filing a petition for review on certiorari within 15 days from receipt of the decision or resolution appealed from. The Supreme Court may, for justifiable reasons, grant an extension of 30 days within which to file the petition.

7.8 Rules Challenging Transactions and Operations in This Jurisdiction

Neither a general anti-abuse rule (GAAR) nor a specific anti-avoidance rule (SAAR) has been adopted in the Philippines.

In one case wherein the BIR imputed interest on an interest-free loan, the Supreme Court ruled that the BIR’s power to allocate gross income does not include the power to impute “theoretical interest” because there must be actual or, at the very least, probable receipt or realisation by the taxpayer of the income that is being allocated. The Supreme Court also recognised that interest cannot be imposed unless expressly stipulated in writing.

Currently, the Philippines still adheres to the distinction between tax evasion and tax avoidance with the latter generally being considered to be acceptable. However, there are specific rules in the Tax Code which seek to prevent tax avoidance practices, such as the substantial change of ownership in connection with net operating loss carryover and limitation on interest expenses. Furthermore, Section 50 of the Tax Code allows the CIR to allocate income and deductions between controlled entities.

8. Cross-Border Tax Disputes

8.1 mechanisms to deal with double taxation.

If the BIR has assessed additional taxes in a cross-border transaction resulting in double taxation, taxpayers typically resort to domestic litigation (as opposed to availing of the mechanisms under the double tax treaty) to appeal the administrative decision.

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) has not been adopted in the Philippines. As of date, the Philippines has double taxation agreements (DTA) with 43 countries. None of these have an arbitration clause, relying, instead, on a mutual agreement procedure (MAP), which is a means through which tax administrations of contracting parties consult to resolve disputes regarding the application of double tax conventions. This procedure can be used to eliminate double taxation that could arise from a TP adjustment.

RR 10-2022 prescribed the guidelines and procedures to be followed by taxpayers in requesting for MAP assistance from the CIR, which is the Philippine-designated competent authority. The rulings and MAP section of the International Tax Affairs Division (ITAD) shall commence the analysis and resolution of MAP cases. However, a taxpayer may, prior to making a formal request for MAP assistance, request for a pre-filing consultation following the procedures outlined in the said regulation. To request for MAP assistance, a taxpayer must submit a request in writing, which must be signed by the taxpayer or its/his/her authorised representative.

8.2 Application of GAAR/SAAR to Cross-Border Situations

Neither a GAAR nor a SAAR has been adopted in the Philippines. Moreover, the Philippines has not yet signed nor ratified the MLI.

8.3 Challenges to International Transfer Pricing Adjustments

The lack of uniform regulations in TP adjustments poses a challenge to both taxpayers and tax authorities in addressing international TP issues. Consequently, the decisions of tax authorities are made on a case-by-case basis. Although the BIR has not yet issued detailed APA regulations, an APA would be expected to address disputes on TP concerns.

As of this writing, international TP adjustments have not been challenged before local tax courts, although there are local tax cases in the CTA wherein TP has been raised as an issue or TP principles/guidelines have been used by the BIR as a tool to make tax assessments against taxpayers.

8.4 Unilateral/Bilateral Advance Pricing Agreements

The TP regulations provide for an APA, which a taxpayer may enter into on a voluntary basis in order to reduce the risk of a TP audit and double taxation. The APA may be either unilateral or bilateral/multilateral.

As of this writing, however, the BIR has yet to issue detailed APA guidelines.

8.5 Litigation Relating to Cross-Border Situations

Withholding taxes and permanent establishment are common issues relating to cross-border transactions. Another common issue is the documentary stamp tax implications of transactions that have both local and international elements (eg, an offshore loan contract with a security agreement that has onshore property as collateral, and vice versa).

We anticipate that TP and taxation of the digital economy will be major sources of tax controversies involving cross-border transactions in the coming years.

9. State Aid Disputes

9.1 state aid disputes involving taxes.

No information is available in this jurisdiction.

9.2 Procedures Used to Recover Unlawful/Incompatible Fiscal State Aid

9.3 challenges by taxpayers, 9.4 refunds invoking extra-contractual civil liability, 10. international tax arbitration options and procedures, 10.1 application of part vi of the multilateral instrument (mli) to covered tax agreements (ctas).

The MLI has not been adopted in the Philippines. The Philippines’ DTAs do not provide an arbitration clause but only a MAP (see 8.1 Mechanisms to Deal With Double Taxation ).

10.2 Types of Matters That Can Be Submitted to Arbitration

Existing DTAs in the Philippines make use of the MAP to resolve matters arising from double taxation. However, these DTAs do not specifically provide a procedure for arbitration and those matters which can be subject to arbitration. Moreover, the MLI has not been adopted in the Philippines.

Generally, a taxpayer who believes that they have been subject to double taxation may raise their concerns with BIR, through ITAD, to resolve the conflict. According to the DTAs, the BIR should endeavour to resolve the case by mutual agreement with the competent authority of the other contracting state, to avoid taxation which is not in accordance with the DTA.

Tax Treaty Relief Applications

RMO 14-2021, as clarified by Revenue Memorandum Circular (RMC) 77-2021, provides the documentary requirements and procedures for tax treaty relief applications (TTRAs). Under these issuances, all income items derived by non-residents entitled to tax treaty relief shall be confirmed by the BIR through the filing of (i) a request for confirmation (RFC) by the withholding agent when the treaty rate for a certain income payment has been used/applied as the withholding tax rate, or (ii) a TTRA by the non-resident taxpayer together with an application for refund of excess taxes withheld, if the regular withholding tax rate is applied.

Issuance of a Certificate of Entitlement to Treaty Benefit (COE) for approved TTRAs and RFCs, instead of a BIR Ruling, was likewise introduced in the foregoing issuances.

RMC 20-2022 clarified that taxpayers who were already issued with COE – where the tenor thereof allows the ruling to be applied to subsequent or future income payments – shall no longer file an RFC or TTRA every time an income of similar nature is paid to the same non-resident. In applying the confirmed treaty benefit to future income payments, the income payor/withholding agent shall always be guided by the requisites mentioned in the COE.

The BIR has also issued RMO 46-2020, which requires the filing of a request for a confirmatory ruling for a taxpayer to avail itself of the 15% reduced rate under the tax sparing provision of the Tax Code.

10.3 Application of the Baseball Arbitration or the Independent Opinion Procedure

Neither baseball arbitration nor the independent opinion procedure is specifically adopted in the Philippines. The rules on arbitration which, in general, prevail in the Philippines require that a fair and reasonable award be rendered by the arbitrator.

10.4 Implementation of the EU Directive on Arbitration

The OECD countries have taken measures to broaden the modes of settling disputes, including international tax arbitration.

10.5 Existing Use of Recent International and EU Legal Instruments

The Philippines has not yet adopted the MLI which provides for a tax arbitration procedure. Thus, the MAP laid down in the DTAs and relevant issuances of the tax authorities are the main instruments used in the Philippines.

10.6 New Procedures for New Developments Under Pillar One and Two

While the Philippines has been making significant progress in its readiness to join the Inclusive Framework on BEPS, it has not yet fully adopted the same. Thus, it is not anticipated that BEPS Pillars One and Two will take effect in the jurisdiction.

The Philippine Congress has proposed several bills to address the tax challenges stemming from the digitalisation of the economy and to impose taxes on certain digital transactions; however, as of this writing, none of these bills have been enacted into law.

10.7 Publication of Decisions

Under the DTAs, a taxpayer may present their case or tax imposition, which is not in accordance with the DTA, to the competent authority (ie, the BIR) of the said state of which they are a resident. Rulings of the BIR on issues of international tax raised by a certain taxpayer are published on its official website for guidance to other taxpayers. Although not binding on courts, BIR rulings may be given persuasive effect by domestic courts.

10.8 Most Common Legal Instruments to Settle Tax Disputes

In settling international tax disputes, reference to the DTAs signed by the Philippines must be made. These DTAs provide for a MAP where the contracting states may engage into discussions on the issue of double taxation. They may communicate directly with each other for the purpose of reaching an agreement and to discuss special cases not provided for in the DTAs.

10.9 Involvements of Lawyers, Barristers and Practitioners in International Tax Arbitration to Settle Tax Disputes

Independent professionals or lawyers can be hired by either the taxpayer or the state to initiate international arbitration. As in the recent Malampaya tax arbitration dispute (see 10.4 Implementation of the EU Directive on Arbitration ), in which SPEX hired an independent law firm to pursue its case.

11. Costs/Fees

11.1 costs/fees relating to administrative litigation.

There is no filing fee for tax cases at the administrative level.

11.2 Judicial Court Fees

The filing fee for instituting a case before the CTA Division is between 0.67% and 1.5% of the amount of the disputed assessment, plus other nominal fees.

These fees are collected from the taxpayer upon filing of a petition which cannot be refunded, regardless of the outcome of the case. Nominal fees will also be paid upon the filing of an appeal with the CTA En Banc and the Supreme Court.

There are also filing fees for tax-related cases filed before other courts or agencies such as the RTC and the CBAA. These filing fees are paid upon the filing of the case.

Payment of filing fees are mandatory and jurisdictional.

11.3 Indemnities

The filing fees to litigate before the CTA, and other costs incurred in connection with the tax litigation (professional/attorney’s fees, out of pocket expenses, etc) are for the taxpayer’s own account, and considered as sunk costs that cannot be recovered/reimbursed.

11.4 Costs of ADR

The mediation fee consists of a basic mediation fee in the amount of PHP2,500 (approximately USD50) and an additional mediation fee of PHP5,000-PHP50,000 (approximately USD100-USD1,000), depending on the sum in dispute.

12. Statistics

12.1 pending tax court cases.

There is currently no available data on the number of cases that are pending before the CTA.

The latest available annual report containing the statistics on case disposition was published in 2016, which provides that the CTA attained a disposal rate (ratio of case output over case input) of 23% and a clearance rate (ratio of case output over cases filed) of 72%.

12.2 Cases Relating to Different Taxes

There is no readily available data regarding the number of cases initiated and terminated every year relating to different taxes.

In tax criminal cases, the CTA has published statistics regarding the number of cases initiated and resolved every year. The latest report in 2018 provides that out of the 38 criminal tax cases initiated and filed before the CTA, only seven cases were decided/resolved during the same year.

12.3 Parties Succeeding in Litigation

There is currently no available data regarding which party succeeds in litigation.

According to latest available annual report published in 2016, the CTA awarded a total of PHP28.9 billion in favour of the litigants.

13. Strategies

13.1 strategic guidelines in tax controversies.

Cost-Benefit Analysis

The taxpayer must evaluate whether pursuing a certain remedy would actually be more beneficial than simply paying.

Filing an appeal entails costs, including filing fees, professional/legal fees, out-of-pocket expenses and other incidental fees. These costs are over and above the potential tax liabilities that the taxpayer may pay if the decision turns out to be unfavourable. Furthermore, interest on tax deficiencies continues to run while the case is pending (unlike in tax refund cases wherein the government is not obliged to pay interest if the taxpayer is entitled to a refund). Therefore, if the taxpayer loses, it can end up with a hefty tax bill. Aside from monetary costs, court litigation also involves time and effort.

In general, when seeking judicial relief, it will take years before the case can be resolved with finality. If the taxpayer does not obtain a favourable judgment, the interest on the deficient taxes continues to accumulate while the case is pending. This goes together with the cost-benefit analysis to be conducted by the taxpayer in deciding which course of action to pursue.

It is generally better to settle the deficient taxes at the audit stage if the claim is indefensible or, even if it is defensible, if the cost of litigation exceeds the proposed assessment.

Strength of the Case

During the course of the tax audit, and before seeking judicial relief, the taxpayer must evaluate the legal and factual bases of its case. The taxpayer must not only provide legal arguments, it should also be able to substantiate these arguments with facts based on documents or the testimonies of witnesses. While the taxpayer’s position may be legally sound and correct, there is always a risk that the taxpayer may lose the case for failure to present sufficient evidence to warrant a favourable ruling.

The taxpayer may also wish to consider exploring settlement. A mediation and compromise settlement may sometimes be a win-win situation for both parties, not only financially, but also regarding the speedy disposition and termination of the case.

SyCip Salazar Hernandez & Gatmaitan

SyCipLaw Center 105 Paseo de Roxas Makati City 1226 Metro Manila Philippines

+632 8982 3500

+632 8817 3570

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Essay on Philippines Taxation

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100 Words Essay on Philippines Taxation

Understanding taxes.

Taxes are payments we make to the government. The government uses this money to pay for public services like schools, hospitals, and roads. In the Philippines, the government body that collects taxes is the Bureau of Internal Revenue (BIR).

Types of Taxes

In the Philippines, there are two main types of taxes. The first is direct tax, which is paid straight to the government. Examples are income tax and corporate tax. The second is indirect tax, like Value Added Tax (VAT), which is added to the price of goods and services.

Income tax is a direct tax. If you work and earn money, you pay a part of your earnings as income tax. The amount you pay depends on how much you earn. The more you earn, the more tax you pay.

Value Added Tax (VAT)

VAT is an indirect tax. It is added to the price of goods and services you buy. In the Philippines, the standard VAT rate is 12%. So, if you buy something for 100 pesos, you actually pay 112 pesos.

Why Pay Taxes?

Paying taxes is important because it helps the government pay for public services. Without taxes, the government would not have enough money to build schools, hospitals, and roads. So, when you pay taxes, you are helping your country.

250 Words Essay on Philippines Taxation

What is taxation.

Taxation is the process where the government collects money from its citizens to fund public services. This money is used for things like building roads, schools, and hospitals.

Philippines Taxation

In the Philippines, there are two main types of taxes: direct and indirect. Direct taxes are paid straight to the government. These include income tax, which is based on how much money you earn, and real property tax, which is based on the value of land or buildings you own.

Indirect taxes are added to the price of goods and services. When you buy something, a part of the money you pay goes to the government as tax. The Value Added Tax (VAT) is an example of this.

Who Collects Taxes?

The Bureau of Internal Revenue (BIR) is the main agency in charge of collecting taxes in the Philippines. They make sure everyone pays the right amount of tax.

Taxes are important because they help the government pay for public services. These services make our lives better and help the country run smoothly. Without taxes, the government would not have enough money to provide these services.

In conclusion, taxation in the Philippines is a crucial process. It is a responsibility of every citizen to pay their taxes correctly and on time. This helps the government provide the services we need and enjoy.

500 Words Essay on Philippines Taxation

Taxation is a system where the government collects money from individuals and businesses. This money is used to pay for public services, like schools, hospitals, and roads. The Philippines, like other countries, has its own unique taxation system.

The Basics of Philippines Taxation

In the Philippines, the Bureau of Internal Revenue (BIR) is the main body that handles taxation. The BIR collects different types of taxes. These include income tax, value-added tax (VAT), and excise tax.

Income tax is the money taken from the earnings of individuals and businesses. For individuals, the rate depends on how much they earn in a year. For businesses, the rate is usually 30% of their net income.

VAT is a type of sales tax. It is added to the price of goods and services. The standard rate in the Philippines is 12%.

Excise tax is added to the price of specific goods like alcohol, tobacco, and petroleum products. The rates for this tax can change depending on the product.

How Taxes are Calculated

In the Philippines, taxes are calculated based on income brackets. This means that people who earn more pay more taxes. For example, if a person earns less than P250,000 a year, they don’t have to pay income tax. But if a person earns more than P8 million a year, they have to pay 35% of their income as tax.

For businesses, the tax is calculated as a percentage of their net income. If a business earns P1 million in a year, they would have to pay P300,000 as tax.

Why Taxes are Important

Taxes are important because they help the government pay for public services. These services include education, healthcare, and infrastructure. Without taxes, the government would not have enough money to provide these services.

Taxes also help the government manage the economy. For example, the government can use taxes to encourage businesses to invest in certain areas or industries.

The Challenges of Philippines Taxation

Despite its importance, the Philippines’ taxation system faces several challenges. One challenge is tax evasion, where people or businesses do not pay the correct amount of taxes. This reduces the amount of money the government has to spend on public services.

Another challenge is the complexity of the tax system. There are many different types of taxes and rates, which can be confusing. This can make it difficult for people and businesses to understand how much tax they need to pay.

In conclusion, taxation is a key part of the Philippines’ economy. It provides the government with the funds it needs to provide public services and manage the economy. However, challenges like tax evasion and complexity make it difficult for the system to work efficiently. Despite these challenges, the government continues to make efforts to improve the system and ensure that everyone pays their fair share.

That’s it! I hope the essay helped you.

If you’re looking for more, here are essays on other interesting topics:

Essay on Philippines Issues
Essay on Philippines History
Essay on Philippines Fun

Apart from these, you can look at all the essays by clicking here .

Happy studying!

TRAIN Law Tax Table 2023: Guide To Computing Your Income Tax

When computing your income tax due, do your due diligence. If you’re not careful enough, you’ll end up paying penalties to the BIR for a mistake in your income tax computation.

Before getting to the hows of tax calculation, it’s crucial to understand gross and taxable income—the two terms often used in income tax calculation.

Disclaimer: This article is for general information only and is not substitute for professional advice.

Go back to the main article: How to Compute Income Tax in the Philippines: An Ultimate Guide

What is gross income.

Gross income is the starting point of computing a taxpayer’s income tax due.

Under the tax code 6 , gross income means all income derived from whatever source.

While that definition appears too generic, the BIR website provides specific examples of what constitutes gross income:

a. Compensation income – Earnings from an employer-employee relationship, including salaries (plus any overtime pay, holiday pay, or night differential pay) , fees, commissions, honoraria , taxable bonuses and allowances, and other benefits

b. Business and professional income – Earnings from running a business or practicing a profession, including profits from the sale of assets, commissions, service fees, professional fees, rental income, and other incomes not covered by compensation income

c. Passive income – Earnings from sources in which the taxpayer is not actively involved, including the following:

Profits from the sale of real properties or shares of stock
Interest earned on bank deposits
Interest and dividends earned on investments
Annuities (e.g., income streams for retirees)
Prizes and winnings
A partner’s share from the net income of a general professional partnership

If you’re earning one or more of these types of income, all of them are included in your income tax computation.

What Is Excluded From Gross Income?

According to the tax code 7 , the following income types are NOT included in a taxpayer’s gross income computation (and are therefore tax-exempt):

SSS , GSIS, Pag-IBIG , PhilHealth , and other government-mandated contributions
13th-month pay and other benefits (e.g., Christmas bonus, performance-based incentives, etc.) worth Php 90,000 and below
De minimis benefits (e.g., paid vacation leave, medical/meal/clothing allowance, rice subsidy, Christmas gifts and achievement awards given to employees, etc.) not exceeding the prescribed maximum amount
Union dues from legitimate labor organizations
Retirement benefits, pensions , gratuities, etc., which have met the requirements of the law

What Is Taxable Income?

Taxable income is the taxpayer’s gross income less allowable deductions . It determines how much income tax must be paid in a given year.

If you’re a self-employed or mixed-income taxpayer, subtract the deductions allowed by the BIR from your gross income to get your taxable income.

The basic formula for income tax purposes is:

Gross Sales/Receipts/Fees

Sales Discounts/Allowances
Sales Returns

Equals: Net Sales/Receipts/Fees

Less: Cost of Sales

Equals: Gross Income from operations

Add: Other income not subject to final tax or tax exemption

Equals: Total Gross Income

Less: Itemized Deductions or OSD

Equals: Taxable Income

What Can Be Deducted From Gross Income?

Self-employed and mixed-income taxpayers can choose between two methods of deduction: itemized deduction and optional standard deduction.

1. Itemized deduction

Itemized deduction 8 involves deducting from gross income all legitimate business expenses incurred during the taxable year. The BIR requires these expenses to be directly related to the operation, management, and development of the taxpayer’s business or professional practice.

Learn More: Itemized Deductions: A Comprehensive Guide for Philippine Taxpayers

Itemized deductions include the following:

Business or professional expenses such as salaries, overhead expenses, and costs of production, travel, entertainment, etc.
Research and development
Interest on debts related to the taxpayer’s business or profession
Tax payments related to the taxpayer’s business or work, except for the income tax, estate tax, donor’s tax, etc.
Losses from the regular operation of the business, sale of capital assets, etc.
Donations to the Philippine government, charitable institutions, religious groups, educational/cultural organizations, etc.
Actual bad debts (receivables from customers or loss on securities held as capital assets that cannot be collected or recovered)
Depreciation (decrease in value of property used in business such as vehicles, equipment, etc.)
Pension trust fund for employees
Depletion of oil and gas wells and mines

On the other hand, taxpayers CANNOT deduct the following expenses from their gross income 9 :

Living, personal, or family expenses
Expenses for construction, improvement, or renovation of a property to increase its value
Expenses for property restoration
Life insurance premium payments covering any employee
Losses from the sale of property under certain conditions

2. Optional standard deduction

The Optional Standard Deduction (OSD) 10 is 40% of Gross Income.

OSD for corporations is in all respects similar to the OSD available to an individual earning business income or income from a profession, EXCEPT that the basis of the 40% OSD is the gross income, which is net of the cost of sales or services (similar to Minimum Corporate Income Tax or MCIT), while for individuals, the basis is gross sales or receipts, before any such costs.

Likewise, Gross Income for OSD purposes does not include income items already subjected to Final Tax or Capital Gains Tax .

The election of the OSD must be communicated in the 1st quarter return. If the corporation used the OSD instead of the itemized deduction in its 1st quarter return, it could not later use the itemized deductions for the Annual Income Tax Return . (RR No. 2-2010)

The tax base of OSD is Gross Income under Sec. 32 of NIRC (National Internal Revenue Code) and Gross sales/receipt for corporations and individuals, respectively.

Gross income under Section 32 of the NIRC as amended:

Gross Income from operations
Sale of ordinary assets
Distributive share of a partner in GPP

Provided that items 7 to 10 are not subject to FWT.

Note that net gains on the sale of capital assets are not part of OSD computation but form part of gross income for other purposes.

Applicability: This is available to all types of taxpayers except non-resident aliens and non-resident foreign corporations

TRAIN Law Tax Table 2023

Graduated rates, which increase as the taxable income increases, apply to the following types of income:

a. Compensation income of local and foreign employees (mandatory)

b. Compensation income of mixed-income earners (mandatory)

c. Business and/or professional income of mixed-income earners and self-employed individuals

Mandatory for those whose gross sales or receipts are above Php 3 million
Optional for those whose gross sales or receipts are equal to or less than Php 3 million

The Tax Reform for Acceleration and Inclusion (TRAIN) Act has lowered the personal income tax since the 2018 taxable year. The tax reform law introduced a new tax structure, resulting in higher take-home pay for employees in the Philippines.

Income taxes are expected to go down further with the new graduated rates starting January 1, 2023.

Graduated income tax rates for January 1, 2023 and onwards:

However, the Philippines is still among the countries with the highest income tax in Southeast Asia.

An ASEAN Briefing report 11 notes that the Philippines, Thailand, and Vietnam have the highest maximum tax rate of 35%, as opposed to Cambodia’s and Singapore’s 20% rates.

How To Compute Your Income Tax Based on Graduated Rates

You can calculate your income tax independently, whether you’re curious about how your employer computes it, or you need to file and pay your tax by yourself.

Here’s a simple formula for the manual computation of income tax:

Income tax due = Taxable income (Gross income – Allowable deductions) x Tax rate – Tax withheld

Sample income tax computation (for the taxable year 2020)

Scenario 1 : employee with a gross monthly salary of php 30,000 and receiving 13th-month pay of the same amount..

1. Get the annual salary: Php 30,000 x 12 months = Php 360,000 .

2. Compute the total annual contributions (employee’s share only):

SSS – Php 800 x 12 months = Php 9,600
PhilHealth – Php 450 x 12 months = Php 5,400
Pag-IBIG – Php 100 x 12 months = Php 1,200

Total annual contributions : Php 16,200

3. Get the taxable income by deducting the total annual contributions from the annual salary: Php 360,000 – Php 16,200 = Php 343,800 .

4. Refer to the BIR’s graduated tax table above to find the applicable tax rate. The taxable income of Php 343,800 falls under the second bracket, which means the tax rate is 15% of the excess over Php 250,000.

5. Compute the annual income tax due.

a. Subtract the non-taxable Php 250,000 from the taxable income: Php 343,800 – Php 250,000 = Php 93,800.

b. Multiply the difference by 15%: Php 93,800 x 0.20 = Php 14,070 .

If the income tax due is the same as the employer’s total amount withheld from the employee’s salary (Php 18,760 during the taxable year or Php 1,172.50 per month), then the employee doesn’t have to pay and file an ITR by the end of the year.

Scenario 2 : Employee with a gross monthly salary of Php 100,000 and receiving 13th-month pay of the same amount.

1. Get the annual salary: Php 100,000 x 12 months = Php 1,200,000 .

2. Since the 13th-month pay is higher than the tax-exempt Php 90,000, the excess of that amount is taxable. Deduct the tax-exempt Php 90,000 from Php 100,000: Php 100,000 – Php 90,000 = Php 10,000. Then add the difference to the annual salary to get the gross income: Php 10,000 + Php 1,200,000 = Php 1,210,000 .

3. Compute the total annual contributions (employee’s share only):

PhilHealth – Php 900 x 12 months = Php 10,800

Total annual contributions : Php 21,600

4. Get the taxable income by deducting the total annual contributions from the gross income: Php 1,210,000 – Php 21,600 = Php 1,188,400 .

5. Refer to the BIR’s graduated tax table above to find the applicable tax rate. The taxable income of Php 1,188,400 falls under the fourth bracket, which means the tax rate is Php 102,500 + 25% of the excess over Php 800,000.

6. Compute the annual income tax due.

a. Subtract the non-taxable Php 800,000 from the taxable income: Php 1,188,400 – Php 800,000 = Php 388,400.

b. Multiply the difference by 25%: Php 388,400 x 0.25 = Php 97,100.

c. Add Php 102,500: Php 102,500 + Php 97,100= Php 199,600 .

Since the annual tax due of an employee earning Php 100,000 monthly is Php 199,600, the employer should have withheld Php 16,633.33 from the monthly salary. If the yearly income tax due is the same as the total amount withheld for the year, the employee is not required to file an ITR on his/her own.

Scenario 3 : Freelance web developer with total gross receipts worth Php 840,000 who opted to use the graduated rates and the 40% optional standard deduction in computing his income tax.

1. Determine the standard deduction by multiplying the gross income by 40%: Php 840,000 x 0.40 = Php 336,000 .

2. To get the taxable income, subtract the OSD from the gross income: Php 840,000 – Php 336,000 = Php 504,000 .

3. Refer to the BIR’s graduated tax table for the applicable tax rate. The taxable income of Php 504,000 falls under the third bracket, which means the tax rate is Php 22,500 + 20% of the excess over Php 400,000.

4. Compute the annual income tax due.

a. Subtract the non-taxable Php 400,000 from the Php 504,000 taxable income: Php 504,000 – Php 400,000 = Php 104,000.

b. Multiply the difference by 20%: Php 104,000 x 0.20 = Php 20,800.

c. Add Php 22,500: Php 20,800 + Php 22,500 = Php 43,300

The self-employed taxpayer must declare Php 43,300 as income tax due when paying and filing an ITR.

Related: How to File and Pay Taxes: An Ultimate Guide to Philippine Tax

Frequently Asked Questions

1. which should i choose: itemized deduction or optional standard deduction.

When filing your first quarterly ITR , you must choose between itemized deduction and optional standard deduction (OSD) if you’ll avail of the graduated tax rates.

It’s an important decision, as your choice takes effect the entire year, and you can’t change it until the start of the next tax year. To help you decide, here are the pros and cons of each deduction method:

Option 1: Itemized Deduction

Advantages. *It can result in higher deductions (as long as you have supporting documents) than what you can claim with the OSD method, especially if you have large business expenses.

* You have control over your taxable income . The more receipts, invoices, bills, and other supporting documents you can collect, the better your chances of lowering your income tax.

*Under itemized deduction, you won’t be required to pay income tax if you incur losses during the taxable year.

Disadvantages. *You must list your every business expense and keep the corresponding receipt (up to 10 years) or proof of the deductible expense. This, in itself, is a tedious task that requires a lot of time and patience.

*You should be meticulous in auditing your records to avoid errors in your tax computation.

*You can hire an accountant if you don’t want to track and itemize your business expenses. You must get a certified public accountant (CPA) to audit and manage your books of accounts if your gross annual sales or receipts exceed Php 3 million. Either way, it can cost you money.

Option 2: Optional Standard Deduction (OSD)

Advantages. *Because the deduction is fixed at 40% of gross sales or receipts, the OSD is more straightforward to compute than the itemized deduction .

*The tax due is more predictable because the taxable income is automatically 60% of your gross sales/receipts.

*It doesn’t require listing, tracking, and computing your expenses (However, keeping records of business expenses is still needed).

*No need to submit the BIR Form 1701 AIF (Account Information Form) or Financial Statements.

*You’re not required to hire a CPA.

*The BIR hardly audits the expenses of OSD filers.

Disadvantages. *If your business expenses exceed your income, filing under OSD will result in higher tax due than an itemized deduction.

*You may lose more money because 60% of your gross sales or receipts are automatically taxed, whether or not you made a profit for the year.

*You must still pay income tax even if you incur losses during the taxable year.

Itemized Deduction vs. OSD: Which Is the Better Method for You?

Filing income tax under itemized deduction is a good idea if you can keep records of all your business expenses and the expenses are higher than 40% of your gross receipts or sales.

If you’re a non-resident foreigner earning income from a business in the Philippines, you can use only the itemized deduction.

On the other hand, choose the optional standard deduction method under any of these circumstances:

*You incur low business expenses, ideally less than 40% of your gross sales or receipts. *You hate getting audited and prefer a simpler, more straightforward way to compute your income tax. *You’re not confident about keeping accurate books of accounts. *You’re a freelancer without regular business expenses.

2. What is Minimum Corporate Income Tax (MCIT), and how to compute it?

Generally, the Minimum Corporate Income Tax or MCIT is a tax imposed on corporations instead of the regular income tax (RCIT) when both conditions are present/met:

1. RCIT is lower than MCIT and; 2. The corporation is in its 4th year of operations following the year of the start of the business.

The tax code allows the government to tax most domestic and resident foreign corporations whether or not they earn taxable income.

When Can a Corporation Be Subject to MCIT?

A corporation may be subject to MCIT if the RCIT is lower than the computed MCIT.

How Do I Compute for MCIT?

The MCIT is 2% of Gross Income , which is Net Sales or Revenue (Gross sales or revenue less discounts, returns, or allowances) less Cost of Sales or Services;

Cost of Sales or Services is directly incurred in bringing about the revenue or sales.

For a trading or merchandising concern, the ‘cost of goods sold’ shall include the invoice cost of the goods sold, import duties, and freight in transporting the goods to the place where the goods are sold, including insurance while the goods are in transit.

For a manufacturing concern, the ‘cost of goods manufactured and sold’ shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums, and other costs incurred to bring the raw materials to the factory or warehouse.

For taxpayers engaged in the sale of service, ‘gross income’ means gross receipts less sales returns, allowances, and discounts 12 .

Note, however, that specific industries have different components of the Cost of Sales or Services, as provided under RMC No. 4-2003.

Sample Computation :

When Does a Corporation Start To Be Covered by MCIT?

A company is liable for MCIT starting the 4th year immediately following the year it commenced its operations. Suppose the Company began operating in 2016 (regardless of the month). In that case, it will be liable for MCIT, provided it is higher than RCIT, starting 2020, the 4th year from 2017 (the year following the year in which it commenced operations).

The MCIT does not apply to non-resident foreign corporations . However, resident Foreign Corporations are also liable for MCIT under Sec. 28(A)(2) of the Tax Code.

Related: How to Claim Foreign Tax Credit to Lower Your Tax Liabilities

When To Pay MCIT?

The tax due shall be equivalent to the MCIT whenever it is higher than RCIT. Accordingly, its computation is done quarterly, the same as RCIT, on a cumulative basis (i.e., the income from and expenses from the first quarter are included in preparing the 2nd quarter return and so on).

Thus, if in a taxable quarter, the MCIT is higher than the RCIT, the former shall be the amount due for payment, less any available tax credits.

Carry-Forward Provision of MCIT

Any excess of the MCIT over the RCIT shall be carried forward 13 and credited against normal tax (RCIT) for the three (3) immediately succeeding taxable years.

In the period it is to be credited, the RCIT should be higher than the MCIT. Thus, if in the three succeeding taxable years, the MCIT is higher than the RCIT, the excess MCIT carry-over would expire and would no longer be creditable beyond that period.

Accounting entry: the accounting entry for excess MCIT carry-over would be :

Debit: Provision for income tax/Income Tax Expense Debit: Deferred Charge – MCIT/MCIT Carry-over Credit: Income Tax Payable/Cash

The provision for income tax or the income tax expense would be equivalent to the normal tax (RCIT), while the Income Tax Payable/Cash would be equivalent to the MCIT. The difference is treated as an asset that may be creditable against the RCIT in the succeeding three years when RCIT is higher.

Suspension of MCIT

The Secretary of Finance is authorized to suspend the imposition of the MCIT 14 on any corporation which suffers losses on account of:

1. Prolonged labor disputes : losses arising from a strike staged by the employees which lasted more than six months within a taxable period and which has caused the temporary shutdown of business operations;

2. Because of force majeure : a cause due to irresistible force by an “act of God” like lightning, earthquake, storm, flood, and the like. This term shall also include armed conflicts like war or insurgency.

3. Legitimate business reverses : include substantial losses due to fire, robbery, theft or embezzlement, or other economic reasons as determined by the Secretary of Finance.

Which corporations are not subject to MCIT?

The MCIT applies only to corporations subject to the RCIT. Accordingly, the following are not subject to MCIT:

1. Propriety educational institutions subject to the tax of 10%; 2. Non-profit hospital subject to 10% tax; 3. Depository banks under the expanded foreign currency deposit system (Foreign Currency Deposit Units [FCDUs]) for offshore income exempt from income tax and onshore income subject to 10% final tax; 4. Offshore banking units similarly taxed as FCDUs; 5. International carriers subject to 2.5% tax on Gross Philippine Billings; 6. ROHQs are subject to 10% tax; 7. PEZA registered entities’ income subject to ITH or the 5% preferential GIT; 8. BOI registered entities for income subject to ITH; 9. REITs. The only corporation that is subject to RCIT but not MCIT 16 [/efn_note]

National Internal Revenue Code (1997), Sec. 27(A)
National Internal Revenue Code (1997), Sec. 27[E][2]
National Internal Revenue Code (1997), Sec. 27[E][3]
4 The Real Estate Investment Trust (REIT) Act of 2009, Section 1, Rule 10
National Internal Revenue Code (1997), Section 32 (A)
National Internal Revenue Code (1997), Section 32 (B)
National Internal Revenue Code (1997), Section 34
National Internal Revenue Code (1997), Section 36
National Internal Revenue Code (1997), Section 34 (L)
Comparing tax rates across ASEAN. (2018, July 26). Retrieved April 15, 2023, from https://www.aseanbriefing.com/news/comparing-tax-rates-across-asean/
15 The Real Estate Investment Trust (REIT) Act of 2009, Section 1, Rule 10

Written by Venus Zoleta

in Accounting and Taxation , BIR , Government Services , Juander How

Last Updated April 15, 2023 05:05 PM

Venus Zoleta

Venus Zoleta is an experienced writer and editor for over 10 years, covering topics on personal finance, travel, government services, and digital marketing. Her background is in journalism and corporate communications. In her early 20s, she started investing and purchased a home. Now, she advocates financial literacy for Filipinos and shares her knowledge online. When she's not working, Venus bonds with her pet cats and binges on Korean dramas and Pinoy rom-coms.

Browse all articles written by Venus Zoleta

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The performance of the U.S. economy should be a winning issue for Biden. I don’t know what the next half year holds in store, but as of now, unemployment is low and inflation, while still elevated, is way down from its 2021 peak. Economic growth is so strong that the Federal Reserve is putting off plans to lower interest rates.

Biden can’t credibly promise to turn things around — to make things much better in the coming term — because they’re already good by standard measures.

It’s just that many voters don’t see it that way. As I blogged on Monday, only 20 percent of likely voters in a survey by The New York Times and Siena College strongly approve of Biden’s handling of the economy as president, while 45 percent strongly approve of Donald Trump’s handling of the economy when he was president. Half rate current economic conditions as “poor.”

I asked people in the Biden White House and in Biden’s campaign as well as outside experts what Americans can expect on economic policy if he wins a second term. The short answer: more of the same. That’s encapsulated in the campaign’s slogan , “Finish the job.”

The biggest difference is that there most likely won’t be a pandemic to fight. The second-biggest difference is that the building blocks of Biden’s pro-worker industrial policy agenda are already in place. The emphasis in a second term would be on the executive branch carrying out that agenda while attempting to get federal budget deficits back under control.

In a campaign speech on Tuesday in his hometown, Scranton, Pa., Biden acknowledged that the economy isn’t working for everybody, but he turned it into a jab at Trump by saying someone complained to him he was drowning in debt. “I said, ‘I’m sorry, Donald, but I can’t help you,’” Biden joked.

There’s a lot we don’t know about how the economy might perform in a second Biden term. There could be a recession, which would cause more red ink (more government spending and lower tax revenue). Congress could reject his initiatives. Trading partners could push back against his economic nationalism.

Biden’s plan continues to adopt the priorities of the progressive wing of the Democratic Party, with some exceptions. He’s fully adopted the left’s argument that corporate greed is a major factor in high inflation. So if re-elected he’ll continue to try to rein in corporate power through antitrust lawsuits and other measures.

He’ll seek to increase taxes on the rich and spending on the poor, including by restoring the pandemic-era expansion of the child tax credit. He’ll continue trying to forge a coalition between the labor and environmental movements by pushing for well-paying, unionized jobs in manufacturing and installation of green technologies.

One of the few objectives that he shares, approximately, with Trump is to reduce America’s dependence on imports from China. His industrial policy — embracing infrastructure, chips and clean tech — is politically centrist, says Brian Deese, an innovation fellow at the Massachusetts Institute of Technology who directed the National Economic Council during Biden’s first two years in office.

On taxes, he is sticking to his promise not to raise them for people earning under $400,000 a year. That’s a political winner, but declaring such a big swath of the national income off limits makes it hard to reduce the big federal budget deficits. One way he does want to shrink deficits is by raising the corporate income tax rate to 28 percent. That would be well above the 21 percent set by the Tax Cuts and Jobs Act of 2017, which was Trump’s signature achievement, but still below the 35 percent rate that prevailed before 2017. He also wants to restore the top marginal tax rate on people to 39.6 percent (up from 37 percent currently) and apply it to individuals earning $400,000 or more a year.

Tax rates go up and down, of course. More unusual is Biden’s plan to try to tax unrealized capital gains. That’s the money you’ve made on paper when an asset you own goes up in value but you haven’t sold it yet. Biden wants to put a minimum 25 percent tax on income plus unrealized capital gains for households worth $100 million or more. Biden calls that his billionaire minimum income tax.

In his State of the Union address in March, Biden repeated his claim that the average federal tax rate for billionaires is 8.2 percent, which he said is “far less than the vast majority of Americans pay.” He cited that figure again in Scranton on Tuesday (although he made it “8.3”).

That’s an apples-to-oranges comparison, though. The rate for billionaires is as low as 8.2 percent only if you include unrealized capital gains in their income. Going by income as conventionally measured, the top 400 families by income paid a 23 percent rate in 2014, the last year for which the Internal Revenue Service released data .

On trade, Biden is far less extreme than Trump, who expressed interest last year in a 10 percent tariff on almost all imports and, according to The Washington Post, has talked with aides about the possibility of a special 60 percent tariff on imports from China.

But Biden is also going after China pretty hard. On Wednesday, the White House announced that Biden would ask his trade representative to more than triple tariffs on some steel and aluminum products from China. Biden has also toughened “Buy American” government procurement policies and is using subsidies to bolster the domestic clean energy sector.

When economists try to predict how the economy would fare in a second Biden term, they assume no drastic change in policies. In other words, it’s the base-line forecast, which is for a gradual decline in inflation and modest but steady economic growth. Pretty good, actually, especially in comparison with predictions for another Trump term, which I plan to write about on Friday.

Like a lot of people, I’m still trying to figure out why voters are so down on Biden’s economic record. I watched the telecast of his speech in Scranton on Tuesday for clues. I think a lot of voters think Biden looks old and doddering, so they conclude that he can’t possibly be a good economic manager. That would be consistent with a Gallup poll conducted in March that found that Biden swamps Trump on likability, honesty and trustworthiness, but trails him on strength, decisiveness and the ability to manage the government effectively.

That’s a high hurdle for the Biden campaign to overcome because it’s scarcely affected by actual data on economic performance.

Elsewhere: The Mental Health of Young Adults Has Deteriorated

Ill-being is the opposite of well-being. It used to be hump-shaped: low among carefree young adults and the contented elderly, highest in unhappy middle age. But the hump has disappeared, for unfortunate reasons, according to new research. Ill-being is now highest among young adults and then steadily declines, according to a working paper by David Blanchflower of Dartmouth College and the University of Glasgow, Alex Bryson of University College London and Xiaowei Xu of the Institute for Fiscal Studies in London.

Rates of depression, despair, economic inactivity and suicide have risen sharply among young adults. The authors point to “a growing body of evidence suggesting that the rise in ill-being of the young is associated with the rise in the use of the internet and smartphones.” One study they cite found that the proportion of young women spending at least five hours a day on internet screens rose to 43 percent in 2021 from 10 percent in 2011.

Quote of the Day

“Between and among the restaurants you can buy rare coins, old jewelry, old or new books, very nice shoes, art supplies, remarkably elaborate hats, flowers, gourmet foods, health foods, imported chocolates. You can buy or sell thrice-worn Dior dresses and last year’s minks, or rent an English sports car.”

— Jane Jacobs, “The Death and Life of Great American Cities” (1961)

Peter Coy is a writer for the Opinion section of The Times, covering economics and business. Email him at [email protected] . @ petercoy

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The feasibility of reducing personal income tax in the Philippines: Its implications to National Internal Revenue Code and National Revenue

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A Guide to Taxation in the Philippines

Tax structure

Corporate income tax

Minimum corporate income tax

Withholding tax

Fringe benefits tax

Branch profit remittance tax

Improperly accumulated earnings tax

Personal income tax

Value-added tax

VAT exemption for exporters of local purchases

What services are subject to VAT exemption?

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What are Taxes & Taxation: A Guide to Understanding Taxes with Your Tax Tita

Quick Tax Info Box: Philippines Edition

Let’s Talk About Taxes and Taxation

Definition of Taxation (because, let’s get our terms straight!):

Unpacking The Jargon: Taxation 101

2. “The process or means”:

3. “By which the sovereign, through its law-making body”:

4. “Raises revenue”:

5. “To defray the necessary expenses of the government”:

Nature and Scope of the Power of Taxation

Nature and Scope of the Power of Taxation:

1.”Comprehensive”:

2.”Plenary”:

3. “Unlimited and supreme”:

4.”Essentially legislative in character”:

5.”Inherent in the state”:

Definition of Taxes :

Demystifying Taxes: Let’s Dive Deeper!

2.”Levied by the state’s law-making body”:

3.”By virtue of its sovereignty”:

4.”Upon the persons or properties within its jurisdiction”:

5.”For the support of the government and all its public needs”:

To Wrap Up Taxes and Taxation Jargon:

Think of taxes like the membership fee to the exclusive club that is the Philippines.

Taxes in the Philippines [Taxation Guide for 2024]

Tax Structure in the Philippines

The Role of BIR

What is Taxable Income?

Types of Taxes in the Philippines

Direct taxes

Withholding tax

Fringe Benefit Tax

Capital Gains Tax

Donor’s Tax

Indirect taxes

Value Added Tax

Documentary Stamp Tax

Local Taxes

Real Property Tax

Business Tax

Tax on Transfer of Real Property Ownership

Tax on Business of Printing and Publication

Franchise Tax

Tax on Sand, Gravel, and Quarry Resources

Professional Tax

Amusement Tax

Annual Fixed Tax for Delivery Vehicles

Tax on Business

Fees for Sealing and Licensing of Weights and Measures

Fishery Rentals, Fees, and Charges