Tax is already a burden to many, especially if you don’t know anything about it or you failed to

comply properly.

Because of the serious implementation and drive of the Bureau of Internal Revenue (BIR) to
raise awareness of paying the right tax, as seen through various paid advertisements on
television, radio and newspapers, and also, with BIR’s Oplan Kandado, Tax Mapping, Letter of
Authority (LA), etc, more and more business and income earners are becoming more aware of
the importance of properly paying and filing the tax dues.

Paying the right tax is an obligation of all income earners in the Philippines. The tax collected by
the BIR will then be used as funds of the government to carry out its duties.

This seminar aims to enlighten the participants on the concept and procedures in filing the proper
tax in order to be compliant and avoid future tax problems.

1. Learn the basic business taxes applicable to business and income earners in the
Philippines
2. Understand the various BIR Forms and their deadlines
3. Know the different tax rates and tax bases in order to compute the proper amount of tax
due

Module 1: Income Tax Principles

Lesson 1: Types of Business Entities Commonly Used, Their Residence and Their Basic
Tax Treatment

Corporate Structures and Tax Treatment

Businesses in the Philippines generally adopt a corporate form, although some businesses
operate through partnerships. Individuals may also operate as sole proprietors or in partnerships.
Corporations are either formed under the Revised Corporation Code of the Philippines (RCC) or
created under special law.
Corporations formed or organised under the RCC may be stock or non-stock corporations. Stock
corporations are those with capital stock divided into shares and authorised to distribute to the
shareholders dividends on the basis of the shares held. All other corporations are non-stock
corporations. Under the RCC, which took effect on 23 February 2019, corporations may be
organised with a sole shareholder ("one-person corporation").
Corporations have the powers provided under the RCC, and may exercise such other powers as
may be essential or necessary to carry out the business purposes stated in their articles of
incorporation. Corporations may exist perpetually.
Corporations are taxed as separate legal entities. For income tax purposes, entities that are not
corporations as defined under the RCC – such as joint-stock companies, joint accounts,
associations, insurance companies, or partnerships – are treated as corporations. However,
general professional partnerships (GPPs), and joint ventures or consortiums formed for the
purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and
other energy operations pursuant to an operating or consortium agreement under a service
contract with the Philippine government are not taxed as separate corporations and the income
tax is imposed on the partners and/or consortium members.
The taxable income of corporations is generally subjected to a 30% corporate income tax (or
their gross income is subject to a minimum corporate income tax (MCIT) of 2%). When
corporations declare dividends to their shareholders, or profits to their partners, in the case of
partnerships that are considered corporations, these dividends and profits are again taxed at the
shareholder – or partner – level. Individual shareholders and partners are generally subject to
10% final tax on dividends. Dividends declared by a domestic corporation to another domestic
corporation or to a resident foreign corporation are not subject to income tax.
Sole proprietorships, on the other hand, have no separate juridical personality. Proprietors are
taxed as individuals, and the income tax rates range from 0%-35%.
Transparent Entities
Among the transparent entities commonly used in the Philippines, GPPs and unincorporated joint
ventures or consortiums are exempt from income tax. The income tax is imposed on their
partners or consortium members.
GPPs are formed by persons for the sole purpose of exercising their common profession, while
non-taxable unincorporated joint ventures or consortiums are those formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium agreement under a service contract with the
Philippine government.
Determining Residence
The incorporation test is used in determining the residence of incorporated businesses for
Philippine taxation purposes.
A corporation organised under Philippine laws is a domestic corporation, while a corporation
organised under the laws of a foreign country is a foreign corporation. A foreign corporation
doing business in the Philippines (for example, through a branch) is considered a resident foreign
corporation. A non-resident foreign corporation refers to a foreign corporation not engaged in
trade or business within the Philippines.
For income tax purposes, domestic corporations are taxed on their worldwide income; foreign
corporations are taxed only on their Philippine-source income.
Income tax of domestic and resident foreign corporations is based on their taxable income, or
gross income less allowable deductions, while non-resident foreign corporations are taxed on
their gross income, without deductions.
For purposes of income taxation, the residence of transparent entities is generally not material
since they are exempt from income tax. However, the determination of the residence of the
individuals or corporations composing the transparent entity is relevant, as they are the ones
directly subjected to income tax.
Tax Rates
Corporations are generally subject to the following taxes.

30% corporate income tax based on taxable income or 2% MCIT based on gross income,
whichever is higher. The 2% MCIT is imposed beginning on the fourth taxable year
following the taxable year the corporation commenced its business operations. The
taxpayer may ask the Commissioner of Internal Revenue (CIR) to suspend the MCIT
under certain circumstances. Any excess MCIT over the regular corporate income tax
(RCIT) may be carried forward and credited against the RCIT for the three
immediately succeeding taxable years.

12% value added tax (VAT).

Local taxes, the rates of which vary depending on the type and location of the business.

Transparent entities (ie, GPPs and certain types of unincorporated joint ventures or consortiums)
are exempt from income tax but are generally subject to the following taxes:

12% VAT; and

local taxes, the rates of which vary depending on the type and location of the business.

Individuals engaged directly in business or through transparent entities are generally subject to
the following taxes:

0%-35% graduated income tax;

12% VAT; and

local taxes, the rates of which vary depending on the type and location of the business.

Key General Features of the Tax Regime Applicable to Incorporated Businesses

Calculation for Taxable Profits
Taxable income is defined as gross income less deductions allowed under the Philippine Tax
Code or other special laws.
Taxable income is not entirely based on accounting profits. Certain items are income for
accounting purposes but are not taxable under the Tax Code. Certain deductions are allowable
for accounting purposes but not under the Tax Code, and vice versa.
For instance, accounting income should be adjusted to exclude from taxable income any income
that has been subjected to final tax, and to add back expenses that under tax laws are not
deductible (eg, provisions for bad debts since under the Tax Code bad debts must be actually
written off to be deductible).
Taxable income is generally computed in accordance with the method of accounting regularly
employed in keeping the books of the taxpayer, but if no such method of accounting has been so
employed, or if such method does not clearly reflect the income, the computation will be made in
accordance with such method as in the opinion of the CIR clearly reflects the income. In the
Philippines, the accounting method is generally based on the Philippine Financial Reporting
Standards (PFRS), but in a case of conflict between the PFRS and tax law and regulations, the
latter shall prevail for purposes of income taxation.
Special Incentives for Technology Investments
Income earned by an alien or a foreign corporation from the use of intellectual property in the
Philippines is considered as Philippine-source income and is subject to Philippine income tax.
Income earned by a resident citizen or a domestic corporation from the use of intellectual
property within or outside the Philippines will be subject to Philippine income tax.
Businesses conducting research and development (R&D) activities may be granted fiscal
incentives such as the income tax holiday (ITH) for a certain period. Under the 2017 Investment
Priorities Plan of the Philippine government, “innovation drivers” such as R&D activities have
been identified as preferred activities for investment subject to incentives. Innovation drivers
also cover the commercialisation of new and emerging technologies and products of the
Department of Science and Technology or government-funded R&D, such as agricultural
biotechnology tools, photonics and nanotechnology, and natural health products.
A taxpayer may treat R&D expenditures, which are paid or incurred during the taxable year in
connection with the taxpayer’s business as ordinary and necessary expenses, as deductible
expenses during the taxable year when they were paid or incurred.
However, subject to the relevant rules and regulations, the taxpayer may opt to treat as deferred
expenses the R&D expenditures that are:

paid or incurred by the taxpayer in connection with his business;

not treated as deductible expenses; and

chargeable to capital account but not chargeable to property subject to depreciation or

depletion.

Such deferred expenses shall be amortised over a period of not less than 60 months, as may be
elected by the taxpayer beginning with the month in which the taxpayer first realises benefits
from such expenditures.
Other Special Incentives
The general investment incentives laws are the Special Economic Zone Act of 1995 ("PEZA
Law"), the Omnibus Investments Code of 1987 (OIC) and the Bases Conversion and
Development Act of 1992 ("BCDA Law").
Under the PEZA Law, businesses located in designated economic zones ("ecozones") and
registered with the relevant ecozone authority are entitled to fiscal incentives such as ITH for a
certain period, a preferential tax rate of 5% on gross income earned in lieu of national and local
taxes except real property tax on land owned by developers, and exemption from taxes and duties
on imported equipment, raw materials and supplies directly needed for the enterprise’s
operations.
Under the OIC, entities engaged in preferred activities and registered with the Board of
Investments are likewise entitled to fiscal incentives such as ITH for a certain period, exemption
from taxes and duties on imported spare parts, and exemption from wharfage dues and export
tax, duty, impost and fees.
The BCDA Law provides fiscal incentives to business enterprises that are located within former
military bases that were converted into ecozones or freeport zones. These incentives include tax
and duty-free importation of raw materials and capital equipment, and a preferential tax rate of
5% on gross income earned in lieu of national and local taxes.
There are other special laws that provide fiscal incentives to certain sectors or undertakings such
as co-operatives, renewable energy developers, exporters and tourism enterprises in order to
promote economic development.

Basic Rules on Loss Relief

The Philippine Tax Code provides that the net operating loss (NOL) of an enterprise (ie, the
excess of allowable deductions over the gross income) for any taxable year immediately
preceding the current taxable year, which had not been previously offset as deduction from gross
income, may be carried over as a deduction from gross income for the next three consecutive
taxable years immediately following the year of such loss. However, any net loss incurred in a
taxable year when the taxpayer was exempt from income tax is not allowed as a deduction.
Additionally, a net operating loss carry-over (NOLCO) shall be allowed only if there has been no
substantial change in the ownership of the business in that:

 not less than 75% in the nominal value of outstanding issued shares, if the business is in
the name of a corporation, is held by or on behalf of the same persons; or

 not less than 75% of the paid-up capital of the corporation, if the business is in the name
of a corporation, is held by or on behalf of the same persons

where such substantial change resulted from the said taxpayer’s merger or consolidation or
business combination with another person, and not through a sale by a shareholder.
Ordinary loss is deductible against ordinary gain and capital gain, while capital loss is deductible
only against capital gain.
Individual taxpayers sustaining a net capital loss in any taxable year are also allowed to deduct
such loss against capital gain in the succeeding taxable year but only in an amount not exceeding
net income in the said taxable year.
Imposed Limits on Deduction of Interest
Interest paid or incurred by a taxpayer within a taxable year on indebtedness in connection with
his business is generally allowed as a deduction from his gross income, but such allowable
deduction for interest expense shall be reduced by 33% of the interest income of the taxpayer
subject to final tax. An example of interest income subject to final tax is interest income from
peso bank accounts, which is subject to 20% final tax.
No deduction is allowed in respect of interest:

 if within the taxable year an individual taxpayer reporting income on the cash basis incurs
an indebtedness on which an interest is paid in advance through discount or otherwise;

 if both the taxpayer and the person to whom the payment has been made or is to be made
are related parties as specified under the Philippine Tax Code; or

 if the indebtedness is incurred to finance petroleum exploration.

The taxpayer may opt to treat interest incurred to acquire property used in business as a
deduction or as a capital expenditure.
Basic Rules on Consolidated Tax Grouping
Consolidated tax grouping is not permitted under Philippine law. Losses incurred by one
company in a group may not be utilised by another company.
Nonetheless, when a taxpayer merges, consolidates or combines with another person, that
taxpayer’s NOL may be transferred or assigned to the surviving or new corporation or entity if
the shareholders of the transferor/assignor gain control of at least 75% or more in nominal value
of the outstanding issued shares or paid-up capital of the transferee/assignee (if the surviving
entity is a corporation) or 75% or more interest in the business of the transferee/assignee (if the
transferee/assignee is not a corporation).
Additionally, in a merger, the NOLCO shall be allowed as a deduction from gross income of the
surviving entity if the taxpayer who sustained and accumulated the NOL is the surviving entity.
Capital Gains Taxation
Net capital gains realised by domestic corporations on the sale or exchange of shares in a
domestic corporation not traded in the Philippine stock exchange are subject to a final tax of
15%. Net capital gains realised by foreign corporations not exceeding PHP100,000 are taxed at
5%, while net capital gains in excess of PHP100,000 are subject to 10% final tax.
The sale of shares listed and traded in the Philippine stock exchange is subject to a stock
transaction tax of 6/10 of 1% based on the gross selling price or gross value in money of the
shares of stock sold.
If the corporation is a non-resident foreign corporation, it may avail itself of tax treaty relief on
capital gains derived from the alienation of property in the Philippines.
Other Taxes Payable by an Incorporated Business
A corporation that, in the course of trade or business, sells, barters, exchanges, leases goods or
properties, or renders services, is subject to VAT at the rate of 12% on the sale of goods or
service, barter or exchange. The importation of goods is likewise subject to VAT.
Depending on the transaction, corporations may be subject to documentary stamp tax (DST),
which is a tax on documents, instruments, loan agreements and papers, and upon acceptances,
assignments, sales and transfers of obligations, rights or properties.
Certain goods manufactured or produced (eg, distilled spirits, tobacco products, mineral
products, petroleum products, sweetened beverages) in the Philippines for domestic sales or
consumption or for any other disposition, or which are imported, are subject to excise tax.
Cosmetic surgery services performed in the Philippines are also subject to excise tax. Excise
taxes are imposed in addition to VAT, and VAT is computed on the gross selling price or gross
receipt plus the excise tax.
Incorporated Businesses and Notable Taxes
Certain income payments are subject to final or creditable withholding taxes. Incorporated
businesses (ie, domestic corporations) may be constituted as withholding agents when they make
payments that are subject to final or creditable withholding tax.
Passive income that is subject to final withholding tax (FWT) is no longer included in the
computation of the taxable income. The following types of passive income earned by
incorporated businesses are subject to the following FWT:

 20% final tax on the amount of interest on currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar arrangements,
and royalties derived from Philippine sources; or

 15% final tax on interest income from a depository bank under the expanded foreign
currency deposit system.

The sale, exchange or disposition of lands and/or buildings that are not actually used in the
business of a corporation and are treated as capital assets is subject to 6% capital gains tax
(CGT) based on the gross selling price or fair market value of the property, whichever is higher.
The sale of shares of stock in a domestic corporation is subject to a separate tax – CGT or stock
transaction tax.
Additionally, incorporated businesses may also be subject to improperly accumulated earnings
tax (IAET) equal to 10% of improperly accumulated taxable income.
Incorporated businesses (ie, employers) are also required to pay a 35% fringe benefits tax on the
grossed-up monetary value of fringe benefits furnished or granted to their employees, except
rank and file employees, unless the fringe benefit is required by the nature of, or necessary to, the
trade or business of the employer, or when the fringe benefit is for the convenience or advantage
of the employer.

MODULE 3: Division of Tax Base Between Corporations and Non-corporate Businesses

Closely Held Local Businesses
Following the general way business is done in the Philippines, closely held businesses would
usually operate in corporate form.
The RCC has its own definition of a "close" corporation. A close corporation is one whose
articles of incorporation provides that (i) all the corporation’s issued stock of all classes,
exclusive of treasury shares, are held of record by not more than 20 persons; (ii) all the issued
stock of all classes are subject to specified restrictions on transfer; and (iii) the corporation is not
listed in any stock exchange or has not made any public offering of its stocks of any class.
The concept of a one-person corporation was recently introduced in the RCC.
 Individual Rates and Corporate Rates
As a rule, corporate practice of a profession is not sanctioned under Philippine law. According to
the Philippine Supreme Court, this rule is hinged on the idea that “the ethics of any profession is
based on individual responsibility, personal accountability and independence, which are all lost
where one verily acts as a mere agent, or alter ego, of unlicensed persons or corporations.”
 3.3 Accumulating Earnings for Investment Purposes
The Philippine Tax Code imposes an IAET at the rate of 10% based on improperly accumulated
taxable income. The IAET is imposed to deter corporations from accumulating profits for the
purpose of avoiding income tax at the shareholder level. The fact that the earnings or profits of a
corporation are permitted to accumulate beyond the reasonable needs of the business is
determinative of the purpose to avoid the tax upon its shareholders, unless contrary evidence is
shown. The IAET does not apply to publicly held corporations, among others.
The RCC also prohibits stock corporations from retaining surplus profits in excess of 100% of
their paid-in capital stock subject to certain exceptions.
 3.4 Sales of Shares by Individuals in Closely Held Corporations
Cash and property dividends received by citizens or resident aliens from their shares in domestic
corporations (including closely held corporations) are subject to a final tax of 10%, while those
received by non-resident aliens engaged in trade or business in the Philippines and non-resident
aliens not engaged in trade or business in the Philippines are subject to a final tax of 20% and
25%, respectively.
Stock dividends are not subject to income tax if the number of shares received is in proportion to
the existing shareholding of the stockholder. However, the issuance of shares through the
declaration of a stock dividend is subject to DST at the rate of PHP2 for every PHP200 of the par
value of the shares issued.
Net capital gains realised by individuals on the sale or exchange of shares in domestic
corporations (including closely held corporations) not traded in the Philippine stock exchange are
subject to a final tax of 15%.
Sales of Shares by Individuals in Publicly Traded Corporations
Cash and property dividends received by individuals (citizens and resident aliens) from their
shares in publicly traded corporations are subject to a final tax of 10%, while those received by
non-resident aliens engaged in trade or business in the Philippines and non-resident aliens not
engaged in trade or business in the Philippines are subject to a final tax of 20% and 25%,
respectively.
Stock dividends declared by publicly traded corporations are likewise not subject to income tax
if the number of shares received is in proportion to the existing shareholding of the stockholder.
However, the issuance of shares through the declaration of a stock dividend is subject to DST at
the rate of PHP2 for every PHP200 of the par value of the shares issued.
Sale of shares listed and traded in the Philippine stock exchange is subject to a stock transaction
tax of 6/10 of 1% based on the gross selling price or gross value in money of the shares of stock
sold.

MODULE 4: Key Features of Taxation of Inbound Investments

 4.1 Withholding Taxes
Interests, dividends and royalties earned by non-resident aliens not doing business in the
Philippines are subject to FWT of 25%.
Interests and royalties earned by non-resident foreign corporations are subject to FWT of 30%.
However, interest on foreign loans received by non-resident foreign corporations is subject to
FWT of 20%.
Dividends earned by non-resident foreign corporations are generally subject to FWT of 30%.
This rate is reduced to 15% if the country of domicile of the non-resident foreign corporation
allows a credit against the tax due from the non-resident foreign corporation taxes deemed to
have been paid in the Philippines equivalent to 15%, which represents the difference between the
RCIT rate of 30% and the 15% tax rate on dividends. This is referred to as tax sparing credit.
 4.2 Primary Tax Treaty Countries
The Philippines is a party to tax treaties with 45 countries. There is no public data available
showing which tax treaty countries are primarily used by investors to make investments in
Philippine corporate stock or debt.
 4.3 Use of Treaty Country Entities by Non-treaty Country Residents
The Philippine Bureau of Internal Revenue (BIR) requires the submission of documents to
ascertain whether an entity applying for a tax treaty relief is entitled to the preferential tax rates
under an applicable tax treaty.
For interest, dividends and royalties, no tax treaty relief application (TTRA) is required but the
non-resident must submit a certificate of residence for tax treaty relief (CORTT) form to the
payor of the income or the withholding agent in order to avail of the preferential treaty rates for
these incomes. Such preferential tax treaty rates or exemptions shall be applied and used outright
by the withholding agents upon submission of CORTT forms by the non-resident, subject to a
compliance check and post-reporting validation during the regular tax audit by the BIR on the
payor or withholding agent. Non-compliance with the regulations prescribing the procedures to
avail of the tax treaty benefits on dividends, interests and royalties is a ground for denial of the
non-resident’s claim for preferential tax treatment, as well as the disallowance of the relevant
expense on the part of the payor or withholding agent.
For other types of income, the availment of tax treaty relief must be preceded by a TTRA filed
with the BIR. If the BIR finds that the entity is not qualified, then the TTRA will be denied.
 4.4 Transfer Pricing Issues
Based on the BIR’s transfer pricing guidelines, intra-firm or inter-related transactions account for
a substantial portion of the transfer of goods and services in the Philippines, but the revenue
collection from related-party groups continues to decrease. The BIR has attributed this to the fact
that related companies are more interested in their net income as a whole rather than as separate
entities. Accordingly, the transfer pricing regulations prescribed the guidelines in determining
the appropriate revenues and taxable income of the parties in controlled transactions by
providing the methods for establishing an arm’s-length price. The regulations also require
taxpayers to maintain or keep documents necessary for the taxpayer to prove that efforts were
exerted to determine the arm’s-length price or standard in measuring transactions among
associated enterprises.
The BIR recently issued the transfer pricing audit guidelines applicable to controlled transactions
including sale, purchase, transfer and use of tangible and intangible assets, intra-group services,
interest payments and capitalisation, among others, between related/associated parties, where at
least one party is subject to tax in the Philippines. For purposes of the guidelines, the permanent
establishment is treated separately from its head office or other related branches or subsidiaries
for tax purposes.
 4.5 Related-Party Limited Risk Distribution Arrangements
The transfer pricing regulations recognise that an appraisal of the risk is important in determining
arm’s-length prices or margins. Only those risks that are economically significant in determining
the value of transactions or margins of entities will be identified and used in the comparability
analysis to be conducted in applying the arm’s-length principle.
Under the audit guidelines, the BIR must conduct a functional, asset and risk analysis in order to
determine the nature of the taxpayer’s business. Functional analysis is performed to obtain
accurate identification on the characteristics of the taxpayer’s business as well of its counterparts,
and consequently, the level of the risks borne and the remuneration or profit (which must be
proportional with the risks borne) can be predicted.
However, this firm has not yet seen and are not aware whether the BIR has already applied these
audit guidelines and specifically challenged the use of related-party limited risk distribution
arrangements.
 4.6 Comparing Local Transfer Pricing Rules and/or Enforcement and OECD Standards
While the Philippines is not a member of the OECD, the transfer pricing regulations issued by
the BIR are largely based on the OECD Transfer Pricing Guidelines.
ey Features of Taxation of Non-local Corporations
 5.1 Compensating Adjustments When Transfer Pricing Claims are Settled
The Philippine Tax Code authorises the CIR to distribute, apportion or allocate gross income or
deductions between or among two or more organisations, trades or businesses, whether or not
incorporated and organised in the Philippines, owned or controlled directly or indirectly by the
same interests, if necessary, in order to prevent evasion of taxes or clearly reflect the income of
any such organisation, trade or business.
Thus, transfer pricing adjustments made by the BIR are to ensure that taxpayers clearly reflect
income attributable to controlled transactions and to prevent tax evasion in such transactions.
Under the transfer pricing audit guidelines, upon finding that the price or rate is not at arm’s
length, the BIR will propose adjustments by imputing the arm’s-length margin (eg, the
discrepancy between the price or profit of the affiliated transactions and the arm’s-length price or
profit). The primary adjustments may also lead to secondary adjustments.
The BIR will discuss their findings with the taxpayer and the latter may contest the facts and
issues identified, similar to the notice of informal conference stage in a regular tax audit.
Thereafter, the regular tax audit process and remedies (eg, protest, administrative and judicial
appeal) will be applicable.
The transfer pricing regulations granted the taxpayers the option to avail of the advance pricing
agreements (APA) and the mutual agreement procedure (MAP) relief. However, difficulties in
the actual implementation have yet to be seen since, to date, the BIR has not yet issued APA or
MAP guidelines.
 5.2 Taxing Differences
The term "non-local corporation" used here shall refer to a foreign corporation, defined under the
Philippine Tax Code as a corporation not created or organised in the Philippines or under its
laws.
Local branches of non-local corporations are taxed differently from local subsidiaries of such
non-local corporations. Local branches of non-local corporations are subject to income tax only
on their Philippine-source income, while local subsidiaries of non-local corporations are
considered domestic corporations and subject to income tax on their worldwide income.
With respect to their taxable income (Philippine-sourced or worldwide as applicable), local
branches and local subsidiaries of non-local corporations are subject to the same tax rates:

 30% corporate income tax based on taxable income; or

 2% MCIT based on gross income.

However, the local branch’s remittance of branch profits to the foreign head office is subject to
branch profit remittance tax of 15%, while remittance of dividends by the local subsidiary to the
foreign head office is subject to FWT of 30% subject to the tax sparing credit.
 5.3 Capital Gains of Non-residents
Net capital gains from the sale of stock in local corporations are always subject to Philippine
income tax, except if there is an applicable tax treaty that grants CGT exemption.
Net capital gains of non-resident individuals arising from the sale of stock in local corporations
not traded in the local stock exchange are subject to CGT of 15%. Net capital gains of non-
resident foreign corporations not exceeding PHP100,000 are subject to CGT of 5%, while any
gain in excess of PHP100,000 is subject to CGT of 10%.
The gain from the sale of shares of a non-local holding company will be considered income from
sources outside the Philippines and will not be subject to Philippine income tax unless the seller
is a resident Philippine citizen or a domestic corporation.
Treaties eliminate CGT under certain conditions. For instance, there are tax treaties that exempt
the net capital gains arising from the sale of shares in a local corporation from CGT if the assets
of the local corporation do not consist principally of real property.
 5.4 Change of Control Provisions
In general, there is no change of control provision that by itself would trigger tax and duty
charges unless the change in control arises from the disposition of shares in a domestic
corporation. However, change of control may affect deductibility of certain expenses such as the
NOLCO, which is deductible from gross income only if there has been no substantial change in
the ownership of a business or enterprise.
 5.5 Formulas Used to Determine Income of Foreign-owned Local Affiliates
The BIR’s Revenue Audit Memorandum Order No 1-95, which contains the audit guidelines and
procedures for the proper determination of the income tax liability of Philippine branches and
liaison offices of multinational enterprises selling goods or providing services, prescribes a
formula whereby a portion of the income derived from Philippine sources by the foreign entity is
attributed and taxed to the branch or the liaison office.
 5.6 Deductions for Payments by Local Affiliates
There is no specific standard applied in allowing a deduction for payments by local affiliates for
management and administrative expenses incurred by a non-local affiliate. As a rule, an expense
may be allowed as a deduction from the gross income of the local affiliate if the same is an
ordinary and necessary expense paid or incurred during the taxable year in carrying on, or which
are directly attributable to, the development, management, operation and/or conduct of the trade
or business of the local affiliate. The transfer pricing guidelines issued by the BIR also require
that the payment should be consistent with the arm’s-length principle. In the case of payment to a
non-local affiliate, the payor must withhold any applicable withholding taxes and remit the same
to the BIR.
 5.7 Constraints on Related-Party Borrowing
In addition to the usual requirements of the deductibility of interest expense, the interest agreed
upon by and between affiliates should be in accordance with the arm’s-length principle adopted
by the BIR, and the necessary withholding taxes withheld and paid to the BIR.
In determining whether the interest payment transactions are at arm’s length, the BIR, under the
transfer pricing audit guidelines, will look into various factors such as the nature and purpose of
the debt, market conditions at the time the loan is extended, amount of principal and period of
the loan, security offered and guarantees, and the amount of debt already held by the borrower.
Key Features of Taxation of Foreign Income of Local Corporations
 6.1 Foreign Income of Local Corporations
The term "local corporation" used here shall refer to a domestic corporation, defined under the
Philippine Tax Code as a corporation created or organised in the Philippines or under its laws.
Foreign income of local corporations is not exempt from corporate tax as they are taxed on
worldwide income.
Philippine-source income and foreign-source income together constitute the local corporation’s
gross income. The local corporation pays the higher of RCIT of 30% based on gross income less
the allowable deductions provided under the Tax Code, or MCIT of 2% based on gross income.
 6.2 Non-deductible Local Expenses
Foreign-source income is not exempt from Philippine income tax. Hence, local expenses
attributable to such foreign-sourced income are deductible, subject to the rules on allowable
deductions provided in the Philippine Tax Code.
 6.3 Taxation on Dividends from Foreign Subsidiaries
Dividends received by local corporations from foreign subsidiaries are included in the local
corporations’ gross income, which, after taking into account the allowable deductions provided
under the Philippine Tax Code, is subject to an RCIT rate of 30%, or subject to MCIT of 2%.
 6.4 Use of Intangibles
Intangibles developed by local corporations may not be used by their non-local subsidiaries in
their business without the former incurring local corporate tax. Local corporations should enter
into a sale or licensing agreement with non-local subsidiaries pursuant to which the local
corporations should receive compensation in accordance with the arm’s-length principle. Any
income derived by the local corporation should be included in its gross income, and after
subtracting the allowable deductions, the taxable income shall be subject to RCIT of 30%.
If local corporations do not recognise income for the use of their intangibles by non-local
subsidiaries, transfer pricing issues may arise.
 6.5 Taxation of Income of Non-local Subsidiaries Under CFC-Type Rules
There are no controlled foreign corporation (CFC) rules in the Philippines. As a rule, Philippine
tax law does not tax a local parent company on the CFC’s taxable income unless the CFC
distributes dividends to the parent company.
 6.6 Rules Related to the Substance of Non-local Affiliates
Following the concept of separate legal personality and piercing the veil of corporate entity, a
non-local affiliate will be considered a resident of the Philippines if circumstances show that the
affiliate is just an extension of the juridical personality of the local corporation. However, this is
largely a fact-driven exercise.
 6.7 Taxation on Gain on the Sale of Shares in Non-local Affiliates
The gain realised by local corporations on the sale of shares in non-local affiliates is included in
the local corporations’ gross income, which is subjected to RCIT of 30% after taking into
account the allowable deductions provided under the Philippine Tax Code or subject to MCIT of
2%.

Module 2: Corporate Income Tax

Domestic corporations and resident citizens are subject to Philippine tax on their
worldwide income; foreign corporations, non-resident citizens and aliens are subject to
Philippine tax on Philippine source income only. The general taxation framework for the
Philippines is set out in the National Internal Revenue Code of 1997, commonly referred to as
the Philippine Tax Code. However, laws relating to tax incentives are generally contained in the
statute governing the relevant investment incentive and close regard needs to be had for frequent
regulations and rulings issued by the Bureau of Internal Revenue. BOI and PEZA-registered
enterprises may be entitled to a tax holiday in the first four to six years of operation depending
whether the registered activity is classified as pioneer or non-pioneer. The tax holiday may be
extended to a maximum of two years, at one year per extension. After the tax holiday, PEZA-
registered enterprises are generally subject to 5% tax on their gross income (sales less direct
costs) in lieu of other local and national taxes. Taxes are imposed at both national and local
government level. The Bureau of Internal Revenue administers national taxes while the treasurer
and assessors’ offices of different local governments administer local taxes. The Bureau of
Customs collects taxes and duties on imports. Regional area headquarters (RHQ) are not subject
to Philippine tax; Regional Operating Head Quarters (ROHQ) are subject to 10% tax on their
taxable income


All registered domestic and foreign companies in the Philippines are liable to pay
corporate income tax.
 Starting in 2020, corporate income tax will be reduced from 30 percent to 20 percent
over a 10-year period through the CITIRA initiative.
 Businesspeople should regularly familiarize themselves with regulations for tax
residency, corporate income tax, withholding tax, and others to remain compliant.

In the Philippines, all companies – domestic or foreign – are liable to pay corporate income tax
(CIT). The tax liability for a corporation is determined by its residency status and is based on the
net income it obtains while carrying out its business activity, normally during one business year.

Beyond CIT, businesspeople should also understand withholding tax and some other taxes.
Business leaders that regularly review corporate taxes in the country – and consult with
 their local advisors – find it easier to remain compliant and leverage any beneficial reforms, such
as rate reductions or incentives.

Residency status of a company

A company is regarded as a resident if it is incorporated under the tax laws of the Philippines or
as a foreign resident corporation that is duly licensed by the Philippine Securities and Exchange
Commission (SEC) to engage in trade or business in the Philippines.

While a domestic company is taxed on its worldwide net taxable income, a foreign company –
resident or non-resident -, is taxed only on income that is received in the Philippines, or that
arises or is deemed to accrue in the country. Non-resident foreign corporations, however, are
taxed on gross income derived from the Philippines.

RELATED SERVICES

 UNDERSTAND THE TAX LANDSCAPE BEFORE INVESTING

Income tax does not include dividends received from domestic corporations; interest on
Philippine currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements; and other passive income previously
subject to final taxes.

Corporate income tax

The applicable CIT rate for both resident and non-resident corporations is 30 percent based on
net taxable income. This is set to change with the introduction of the Corporate Income Tax and
Incentives Rationalization Act (CITIRA) in September 2019. CITIRA will see CIT rates
reduced to 20 percent in annual increments of 1 percentage point over a 10-year period starting
in 2020.

Withholding tax

Dividends
Dividends distributed by a resident company are subject to withholding tax at 30 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

Interest paid to a non-resident is subject to a 20 percent withholding tax unless otherwise

stipulated under a tax treaty.

Royalty

Royalty payments made to a domestic or resident company are subject to a final withholding tax
of 20 percent. A 30 percent withholding tax is levied on royalty payments to non-residents.

Other taxes imposed on corporations

Fringe Benefits Tax (FBT)

Fringe benefits granted to supervisory and managerial employees are subject to 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 not limited to housing; expense accounts; vehicles; household
personnel; interest on loans at less than 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 (BPRT)

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 on 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.
 RELATED SERVICES

 LEARN MORE ABOUT REMITTANCES

After-tax profits remitted by a branch do not include income items which 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.

Minimum Corporate Income Tax (MCIT)

A minimum corporate income tax (MCIT) of 2 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 2 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

Improperly Accumulated Earnings Tax (IAET)

Income accumulated by closely-held corporations with a 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 tax base of the 10 percent IAET is the taxable income of the current year plus income
exempt from tax, income excluded from gross income, income subject to final tax, and the
amount of net operating loss carry-over deducted.

Corporations excluded from the ambit of the IAET include banks and other nonbank financial
intermediaries; insurance companies; publicly-held corporations; taxable partnerships; general
professional partnerships; non-taxable joint ventures; and duly registered enterprises located
within the special economic zones declared by law which enjoy payment of special tax rate on
their registered operations or activities in lieu of other taxes, national or local.

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.

1. What is Corporation?
2. Corporations Exempt from Income Tax
3. Normal & Minimum Corporate Income Tax (NCIT-MCIT)
4. Illustration (Quarterly and Annual)
5. FS Presentation
6. Filing of Returns
7. Exempt Income
8. Rules on Deductibility of Expenses
9. How to File BIR Returns
10. Common Income Tax Issues

Module 3: Value-Added Tax

1. What is VAT?
2. VAT Registration
3. VAT Invoice and VAT Official Receipt
4. Invoicing Reqts
5. VAT Transactions and Rates
6. How to fill up VAT returns and Deadline
7. Common VAT Issues

Module 4: Withholding Tax at Source

1. What is Withholding Tax?
2. Perosns required to deduct and withhold
3. Types of withholding tax
4. Final withholding tax
5. Fringe Benefit tax
6. How to fill up BIR Returns
7. Common withholding tax issues

Module 5: Tax Assessment, Surcharge and Interest

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