This country-specific Q&A provides an overview to tax laws and regulations that may occur in Philippines.
It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.
This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax-3rd-edition/
How often is tax law amended and what are the processes for such amendments?
Philippine Tax laws are relatively stable. It usually take years before a tax law is amended and it requires a number of factors such as current economic condition, revenue requirement and government spending, among others, to initiate it. As it is a legislative function, amendment of tax laws is a tedious process as it has to comply with the requirements of the Philippine Constitution. This means that it should be approved by both houses of Congress and signed by the President of the Philippines.
What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?
As a rule, all corporations, partnerships or persons required by law to pay internal revenue taxes are also required to keep books of accounts and records in accordance with standard accounting rules and regulations. These books of accounts consist mainly of a journal and a ledger, or their equivalents, and should contain all information necessary for the accurate determination of the internal revenue taxes due on the business. Subsidiary books can also be maintained depending on the requirements of the business and at the option of the taxpayer. These records should be registered with the Philippine Bureau of Internal Revenue and can be either computer based or the traditional manual books of accounts. The law requires that the records be preserved for a period of three (3) years from the date of the last entry thereon. However, tax regulations require that the taxpayer preserve the records for ten (10) years for purposes of tax assessments.
Filing of returns are regularly done on a monthly, quarterly or annual basis depending on the type of taxes involved.
Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?
For national taxes which are imposed by the national government under the Tax Code and other related laws, the main regulatory authority is the Bureau of Internal Revenue. For tariff and customs duties imposed under the Tariff and Customs Code of the Philippines, the regulatory authority is the Bureau of Customs. For local or municipal taxes under the Local Government Code, it is the concerned local government unit which regulates it. Standard tax issues are relatively resolved in a short time. However, complex and policy issues that involve substantial amount take years and are usually elevated to the court for resolution.
Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?
Yes, tax issues and disputes which are not resolved administratively can be elevated to the Court of Tax Appeals which has exclusive jurisdiction to adjudicate on the matter. The judicial proceedings normally take at least two years and another year or two in case of an appeal to the Supreme Court.
Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?
The dates for payment of taxes are the dates prescribed for the filing of tax returns. This is the “pay as you file system” followed in the Philippines. The dates for filing of returns depend on the type of taxpayer and the nature of tax to be paid. Generally, individuals are required to file their income tax returns on or before the fifteenth day of April each year covering the income for the preceding taxable year while corporations are required to file on or before the fifteenth day of April or on or before the fifteenth day of the fourth month following the close of its fiscal year, as the case may be. In case of a dispute with the tax authority, a taxpayer can avail of the administrative remedy of filing a Protest. If the Protest is denied or is not resolved by the Commissioner of Internal Revenue, the taxpayer can avail of judicial remedy by filing a Petition before the Court of Tax Appeals and the Supreme Court. There is no requirement to pay a disputed tax assessment. In fact, even if the tax dispute reaches the Court,its collection, in most cases, is suspended upon the posting of a bond. However, the amount of unpaid tax as finally determined by the Court is subject to interest and penalties computed from the date when the tax was due.
Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government?
Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public Register of beneficial ownership?
Yes, it is confidential and cannot be divulged to third parties unless judicially ordered in connection with a pending court case. There is also a specific provision in the Tax Code which makes it unlawful for any officer or employee of the Bureau of Internal Revenue to divulge trade secrets and other information acquired in the performance of their official duties. However, the Tax Code mandates the Bureau of Internal Revenue and other government agencies to share information which are necessary to improve tax collections. This data sharing can cover matters relating to production and sales of manufacturing companies, gross receipts of land, sea and air transport firms, revenue of telecommunications firms, amount of interest and other income of banks, contracts entered into with private contractors, and names and addresses of all active registered corporations and partnerships with their financial statements. In addition, taxpayer’s information on bank deposit accounts can also be shared under existing international conventions on tax matters subject to the terms provided therein. In any case, all request for information and documents should be coursed through the Commissioner of the Bureau of Internal Revenue who alone approves all these requests as a matter of procedure.
The Philippines is not a signatory to the Common Reporting Standard and does not maintain a public Register of beneficial ownership at the moment. However, as it considers global trends and adheres to international norms that are consistent with its domestic policies, it may in the future implement these matters.
What are the tests for residence of the main business structures (including transparent entities)?
For tax purposes, an entity is considered a resident if it is incorporated in the Philippines, or if incorporated abroad, it is licensed to transact business in the Philippines (making it a resident foreign corporation).
Have you found the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?
Except for transfer pricing issues, the regulation and monitoring of cross-border transactions within an international group is not currently a target of the Philippine tax authorities. It may even be said that the tax authorities have somehow relaxed the monitoring of cross-border transactions. An example of this is the recent decision of the tax authorities to dispense with the requirement of securing a tax treaty relief ruling to claim exemption or preferential treaty rates on royalties, interests and dividends received from the Philippines. As a result, tax treaty benefit for these types of income may be claimed outright. As it stands now, if royalty, interest or dividend income has to be paid, the withholding agent just has to report the tax treaty availment using a prescribed tax form within thirty (30) days from payment of the applicable withholding taxes.
Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
The Philippines does not have statutes and regulations on CFCs and thin capitalization.
On transfer pricing, Section 50 of the Tax Code provides the legal basis for issuance of transfer pricing rules. Section 50 allows the Commissioner of Internal Revenue to allocate gross income or deductions between or among two or more organizations, trades or businesses (whether or not incorporated or registered in the Philippines), if he determines that such allocation is necessary in order to prevent the evasion of taxes to clearly to reflect the income of any such organization, trade or business.
Pursuant to this Tax Code provision, the Philippines adopted a transfer pricing guidelines (Revenue Regulations 2-2013, issued on January 23, 2013) which are based on the OECD transfer pricing guidelines. The transfer pricing methods allowed by the guidelines are the comparable uncontrolled price method, resale price method, cost-plus method, profit split method (residual profit approach and contribution profit split approach), and transactional net margin method.
Revenue Regulations No. 2-2013 requires companies to maintain transfer pricing documentation to prove that their transfer prices are consistent with the arm’s length principle. The guidelines do not require transfer pricing documents to be submitted when the tax returns are filed, but such documents should be retained by the taxpayers and submitted to the tax authorities when required or requested to do so.
Taxpayers may obtain an advance pricing agreement (APA) for their controlled transactions. If a taxpayer avails of an APA, it may choose between a unilateral and bilateral/multilateral APA. If a taxpayer does not choose to enter into an APA and its transactions are subject later on to transfer pricing adjustments, it may invoke the mutual agreement procedure article under the applicable tax treaties to resolve double taxation issues.
Is there a general anti-avoidance rule (GAAR) and, if so, in your experience, how would you describe its application by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only etc?
The Philippines does not have a general anti-avoidance rule. However, issues concerning tax avoidance usually end up litigated for judicial determination as tax authorities interpret tax laws in favor of the government.
Have any of the OECD BEPs recommendations been implemented or are any planned to be implemented and if so, which ones?
The Philippines has not yet implemented any of the OECD BEPS recommendations. Moreover, it is not yet a member of the BEPS Inclusive Framework.
In your view, how has BEPS impacted on the government’s tax policies?
The Tax Reform for Acceleration and Inclusion (TRAIN) is comprehensive tax reform package that is now pending with the Philippine Congress. The TRAIN is composed of five (5) packages dealing with different areas of taxation. However, none of the packages contain proposals on the adoption of any of the BEPS Action Plan points in the Tax Code. Thus, it seems that adoption of the BEPS Action Plan is not an immediate priority in the government’s tax policies.
Does the tax system broadly follow the recognised OECD Model?
Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties.
If so, what are the current rates and are they flat or graduated?
The Philippines tax system broadly follows the recognized OECD Model. Business profits, employment income and pensions are subject to tax. Passive income such as dividends, interest and royalties are likewise subject to tax. Ordinary and capital gains from real property, as well as capital gains from other capital assets are subject to tax. The tax system also has a VAT regime and imposes stamp duties.
Resident citizens are taxed on income derived from sources within and outside the Philippines, while non-resident citizens, resident aliens and non-resident aliens engaged in trade or business in the Philippines are taxed only on Philippine-sourced income.
The taxable income of resident citizens, non-resident citizens, resident aliens and non-resident aliens engaged in trade or business in the Philippines are subject to the following regular income tax rates:
(a) Effective January 1, 2018 until December 31, 2022:
Not over P250,000
Over P250,000 but not over P400,000
20% of the excess over P250,000
Over P400,000 but not over P800,000
P30,000 + 25% of the excess over P400,000
Over P800,000 but not over P2,000,000
P130,000 + 30% of the excess over P800,000
Over P2,000,000 but not over P8,000,000
P490,000 + 32% of the excess over P2,000,000
P2,410,000 + 35% of the excess over P8,000,000
(b) Effective January 1, 2023:
Not over P250,000
Over P250,000 but not over P400,000
15% of the excess over P250,000
Over P400,000 but not over P800,000
P22,500 + 20% of the excess over P400,000
Over P800,000 but not over P2,000,000
P102,500 + 25% of the excess over P800,000
Over P2,000,000 but not over P8,000,000
P402,500 + 30% of the excess over P2,000,000
P2,202,500 + 35% of the excess over P8,000,000
Individual citizens, resident aliens, and non-resident aliens engaged in trade or business in the Philippines are subject to a 20% final tax on interest and royalties. Dividends received by individual citizens and resident aliens are subject to 10% final tax, while those received by non-resident aliens engaged in trade or business in the Philippines are subject to 20% final tax. Capital gains derived from the disposition of real property classified as capital assets are subject to a 6% final tax. Income from the sale of real property classified as ordinary assets, on the other hand, is subject to the regular income tax rates. Capital gains from the sale of shares of stock not traded in the stock exchange are subject to a 15% final tax.
Non-resident alien individuals not engaged in trade or business in the Philippines are subject to 25% tax on gross income received from all sources within the Philippines (including interest, royalties and dividends). Capital gains derived from the disposition of real property classified as capital assets are subject to a 6% final tax. Capital gains from the sale of shares of stock not traded in the stock exchange are subject to a 15% final tax.
Domestic corporations are taxed on taxable income derived from all sources within and outside the Philippines. Foreign corporations are taxed only on income derived from Philippine sources.
Domestic corporations and resident foreign corporations are subject to a 30% income tax based on taxable income. Royalties and interest from deposits and deposit substitutes are subject to 20% final tax. Capital gains derived from the sale of stock not traded in the stock exchange are subject to 15% final tax for domestic corporations, and 5%/10% final tax for resident foreign corporations. Dividends received by domestic corporations and resident foreign corporations from another domestic corporation are exempt from income tax.
Profits remitted by a branch office of a foreign corporation to its head office are subject to a 15% tax, based on the total profits applied or earmarked for remittance, without any deduction for the tax component thereof.
Non-resident foreign corporations are subject to a 30% income tax on income from all sources within the Philippines, including interest, royalties, dividends and capital gains, except capital gains derived from the sale of stock not traded in the stock exchange, which is subject to 5%/10% final tax. The 30% tax on dividends may be reduced to 15% subject to compliance with the requirements for tax sparing credit.
A 12% VAT is imposed on the sale, exchange, lease and importation of goods, as well as on services rendered in the ordinary course of business.
The Philippine Tax Code also imposes stamp duties on several types of transactions, including (1) original issuance of shares of stock (1% of the total par value); (2) subsequent transfers of shares of stock (0.75% of the total par value); (3) debt instruments (0.75% of the issue price); and (4) transfers of real property (1.5% of the consideration or fair market value, whichever is higher).
Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?
Yes, business taxes are levied on revenue profits computed based on Philippine Accounting Standards (PAS) and International Accounting Standards (IAS). However, there are certain ceilings imposed by the Tax Authority on some items of deductions for purposes of computing the taxable income.
Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities? What entities are transparent for tax purposes and why are they used?
Yes, these entities are recognized as taxable entities. The exception is general professional partnerships, which are not subject to income tax. Individuals carrying on business in a general professional partnership are taxable on their distributive shares of the income of the partnership, whether distributed or not.
Is liability to business taxation based upon a concepts of fiscal residence or registration? Is so what are the tests?
Registration is the main basis for business taxation in the Philippines. It is basic that an entity should be registered and licensed by government agencies such as the Securities and Exchange Commission for corporations and partnerships and the Department of Trade and Industry for single proprietors, as a requirement for doing business in the Philippines. In the absence of registration or a license, a foreign entity cannot maintain or intervene in any action, suit or proceeding in any court or administrative agency in the Philippines but it can be sued on any valid cause of action under Philippine laws. However, regardless of business registration, an entity can still be subject to taxation on income and other activities rendered in the Philippines.
Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?
Yes, there are special taxation regimes applied for entities registered with special economic zones and those granted incentives by the Board of Investments.
In addition, regional operating headquarters (ROHQs) and regional headquarters (RHQs) are granted special tax rates. RHQs are not subject to income tax while ROHQs are subject to a lower income tax rate of 10% of taxable income.
A RHQ is an office whose purpose is to act as an administrative branch of a multinational company engaged in international trade which principally serves as a supervision, communications and coordination center for its subsidiaries, branches or affiliates in the Asia-Pacific Region and other foreign markets, and which does not earn or derive income in the Philippines.
A ROHQ is a foreign business entity which is allowed to derive income in the Philippines by performing qualifying services to its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific Region and in other foreign markets. ROHQs may engage in any of the following qualifying services:
(a) General administration and planning;
(b) Business planning and coordination;
(c) Sourcing/procurement of raw materials and components;
(d) Corporate finance advisory services;
(e) Marketing control and sales promotion;
(f) Training and personnel management;
(g) Logistics services;
(h) Research and development services, and product development;
(i) Technical support and maintenance;
(j) Data processing and communication; and
(k) Business development.
Foreign banking, non-banking, financial and non-financial institutions may register RHQs and ROHQs.
Are there any particular tax regimes applicable to intellectual property, such as patent box?
There is no special tax regime specifically intended for intellectual property.
Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?
There is no fiscal consolidation for tax purposes under Philippine tax laws. Likewise, there is no group contribution system for tax purposes. Corporations are treated separately for tax purposes. However, for tax investigation purposes, the Tax Authority considers the grouping of several companies under one controlling interest( usually set at 30%) to determine proper allocation of cost and expenses. Group contribution can be allowed across affiliated companies subject to proper documentation and it is usually cleared with the Tax Authority for a ruling to avoid an issue with tax examiners.
Are there any withholding taxes?
Yes, the Philippines tax system has final and creditable withholding taxes. The rates vary depending on the nature of the income payment and the recipient.
Are there any recognised environmental taxes payable by businesses?
There is no environmental tax imposed by the Tax Code. However, there are several special laws that impose environmental fees and charges collected by the national and local governments, such as the Clean Air Act of 1999, Ecological Solid Waste Management Act of 2000, Mining Act, and Clean Water Act of 2004.
Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?
Dividends received by domestic corporations and resident foreign corporations from another domestic corporation are exempt from income tax. Dividends received by a domestic corporation from foreign corporations are subject to the 30% regular corporate tax.
Non-resident foreign corporations are subject to a 30% tax on dividends received from domestic corporations, which may be reduced to 15% subject to compliance with the requirements for tax sparing credit.
If you were advising an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered?
The Philippines is one of the most vibrant economies in South East Asia and its strategic location is an advantage for businesses that require distribution in major Asian markets. Availability of skilled workforce is not a problem and there is no language barrier to contend with for the Philippines is an English speaking country. On top of these, tax incentives and special regimes are also available for certain activities that are not reserved for local businesses. Activities that are identified and encouraged can register with the Board of Investments for incentives on a pioneer or non-pioneer status. Other incentives can also be secured if the business activity is qualified for registration with the Philippine Economic Zone Authority and by operating in any of its accredited zone areas. Businesses in these areas are mostly export enterprises. The incentives include, among others, income tax holiday, tax and duty free importation and a special 5 per cent tax regime based on gross income. Freeport and other special economic zones are also available to foreign investors. More than this, the Philippines is focused on building the needed infrastructure under the current administration’s Build, Build, Build Program that is aimed to address the long complained transport, communication and power deficiency issues of foreign investors.