Corporate tax in Philippines

Summary

Corporate Income Tax Rate (%) 30
Capital Gains Tax Rate (%)
Real Property 6 (a)
Shares 5 / 10 (b)
Branch Tax Rate (%) 30 (c)
Withholding Tax (%)
Dividends 0 (d)
Interest on Peso Deposits 20 (e) (f)
Royalties from Patents, Know-how, etc. 20 (f)
Branch Remittance Tax 15
Net Operating Losses (Years)
Carryback 0
Carryforward 3 (g)

a) See Section B.

b) These rates apply to capital gains on shares in domestic corporations not traded on a local stock exchange. See Section B for further details and for the rates applicable to gains derived from sales of shares traded on a local stock exchange.

c) Certain types of Philippine-source income of foreign corporations are taxed at preferential rates (see Section B).

d) Under domestic law, dividends paid to domestic corporations or resident foreign corporations are not subject to tax. Dividends paid to nonresident foreign corporations are generally subject to a final withholding tax of 30%. However, this rate may be reduced to 15% if certain conditions are met (see Section B).

e) The withholding tax rate for interest on peso deposits derived by domestic and resident foreign corporations is 20%. For preferential rates under tax treaties for nonresident foreign corporations, see Section F. For preferential rates on interest derived from foreign currency deposits, see Section B.

f) Under domestic law, if the recipient is a nonresident foreign corporation, the final withholding tax rate is 30%. For reduced rates under tax treaties for non resident foreign corporations, see Section F.

g) See Section C.

Taxes on corporate income and gains

Corporate income tax. Domestic corporations are taxed on their worldwide net taxable income. Domestic corporations are corpo­rations incorporated under the laws of the Philippines. Resident foreign corporations are taxed on net taxable income derived from the Philippines, and nonresident foreign corporations are taxed on gross income derived from the Philippines. A resident foreign cor­poration (a branch) is one created under foreign laws and engaged in trade or business in the Philippines. Any other foreign corpora­tion is considered a nonresident.

Rates of corporate tax. Domestic and foreign corporations are subject to tax at a rate of 30%.

Subject to certain exceptions, a 2% Minimum Corporate Income Tax (MCIT) may be imposed on domestic and resident foreign corporations beginning with the fourth tax year following the year of commencement of business operations. The MCIT must be paid if the corporation has zero or negative taxable income or if the MCIT is greater than the regular corporate income tax liability.

Philippine-source income of foreign corporations taxed at prefer­ential rates includes the following.

Type of income Rate (%)
Interest income derived by offshore banking units (OBUs) from foreign-currency loans
granted to residents
10
Income derived by OBUs authorized by Bangko
Sentral ng Pilipinas (BSP; the central bank)
from foreign-currency transactions with
nonresidents, other OBUs and local
commercial banks, including branches
of foreign banks authorized by the BSP
to transact business with OBUs
0
Interest income of domestic corporations and resident foreign corporations from peso bank deposits and yields or other monetary benefits from deposit substitutes and from trust funds
or similar arrangements
20
Interest income of domestic corporations and
resident foreign corporations from depository
banks under the expanded foreign-currency
deposit system
7.5
Income of nonresidents from transactions
with OBUs and depository banks under the
expanded foreign-currency deposit system
0
Royalties derived by resident foreign corporations
from sources in the Philippines
20
Gross Philippine billings of international carriers
doing business in the Philippines
2.5
Taxable income of regional operating headquarters
of multinational companies engaged in the
following: general administration and planning
services, business planning and coordination,
sourcing and procurement of raw materials and
components, corporate finance and advisory
services, marketing control and sales promotion,
training and personnel management, logistic
services, research and development services
and product development, technical support
and maintenance, data processing and
communication, and business development
10
Rentals, charter fees and other fees derived by nonresident owners or lessors of vessels
chartered by Philippine nationals
4.5
Rentals, charter fees and other fees derived
by nonresident lessors of aircraft, machinery
and other equipment
7.5
Gross income of nonresident cinematographic
film owners, lessors or distributors
25
Interest on foreign loans 20

Domestic and foreign enterprises registered with the Board of Investments under the 1987 Omnibus Investments Code may be granted an income tax holiday and exemption from certain other taxes and duties. Enterprises located in special-economic zones that are registered with the Philippine Economic Zone Authority (PEZA) or the special-economic zones may be granted an income tax holiday or a special tax regime under which a 5% tax is im – posed on gross income instead of all national and local taxes.

Profits remitted by a branch to its head office are subject to a 15% tax. This tax is imposed on the total profits remitted, or ear­marked for remittance, without deduction of tax. The tax does not apply to profits from activities registered with the PEZA. Divi­dends, interest, royalties, rent and similar income received by a foreign corporation from sources in the Philippines are not treat­ed as branch profits unless they are effectively connected with the conduct of a trade or business in the Philippines.

Capital gains. A 6% tax is imposed on capital gains presumed to have been derived from the sale, exchange or disposition of land or buildings classified as capital assets. The tax is applied to the gross selling price or the fair market value, whichever is higher.

Gains derived from the sale of shares of domestic corporations not traded on the stock exchange are subject to tax at a rate of 5% of the net capital gain not exceeding PHP100,000 and at a rate of 10% on the excess. If the shares are listed and traded through the facilities of the Philippine Stock Exchange, the tax is 0.5% of the gross selling price. A tax is also imposed on the sale, barter, ex­change or other disposition through an initial public offering of shares of stock in a closely held corporation at a rate of 1%, 2% or 4% of the gross sales price of the shares.

Administration. A corporation may use the calendar year or a fis­cal year as its tax year.

Corporations must file quarterly returns within 60 days from the close of each of the first three quarters of the tax year, and a final or adjusted return on or before the 15th day of the fourth month following the close of the tax year. The corresponding tax is paid at the time the return is filed.

Dividends. Dividends received by a domestic or resident foreign corporation from a domestic corporation are not subject to tax. If the recipient is a nonresident foreign corporation, the 30% tax may be reduced to 15% if any of the following circumstances exists:

  • The country of domicile of the recipient does not impose any tax on offshore or foreign-source income.
  • The country of domicile of the recipient allows a credit for taxes deemed paid in the Philippines equal to 15%, which rep­resents the difference between the regular corporate income tax rate of 30% and the 15% preferential tax on dividends.
  • The dividend is not taxed in the recipient’s country of domicile.

Foreign tax relief. For domestic corporations, tax credits are allow­ed for income taxes paid or accrued to any foreign country, sub­ject to certain limitations. Alternatively, such income taxes may be claimed as a deduction from taxable income. Resident foreign corporations are not allowed to credit tax paid to foreign coun­tries against Philippine income.

Determination of trading income

General. The computation of income for income tax purposes must be in accordance with the accounting method regularly em­ployed in maintaining the taxpayer’s books of account, provided that method clearly reflects income.

Other allowable deductions include the usual, ordinary and neces­sary business expenses, such as interest, taxes, losses, bad debts, charitable and other contributions, and contributions to a pension trust. All of these expenses are required to be directly attributable to the development, management, operation or conduct of a trade or business in the Philippines.

The deduction for interest expense is reduced by an amount equal to 33% of interest income that has been subject to final tax. Inter­est incurred to acquire property used in a trade or business may be claimed as a deduction or treated as a capital expenditure.

Research and development expenses that are paid or incurred during the tax year in connection with a trade or business and that are not chargeable to a capital account or treated as deferred expenses may be claimed as deductible expenses.

Inventories. Inventory valuation must conform as nearly as possible to the best accounting practice in the trade or business and must clearly reflect income. The most commonly used methods of inven­tory valuation are cost and the lower of cost or market.

Tax depreciation. Taxpayers may deduct a reasonable allowance for exhaustion and wear and tear (including obsolescence) of prop­erty used in a trade or business. The depreciation method used must be reasonable and generally accepted in the particular indus­try. Depreciation methods that are generally acceptable in clude the straight-line method, declining-balance method, the sum-of-the-years’ digits method or any other method that may be prescribed by the Secretary of Finance. Resident foreign corporations may claim depreciation only on property located in the Philippines.

Relief for losses. Net operating losses may be carried forward three years to offset future income in those years. A net operating loss is defined as the excess of allowable deductions over gross income in a tax year. Net losses may not be carried forward if the losses are incurred in a year in which a corporation is exempt from income tax or if a substantial change of ownership occurs.

Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate
Value-added tax (VAT); imposed on all
persons who, in the course of their trade
or business, sell, barter, exchange or lease
goods or properties (including intangible
personal properties and real properties),
render services or import goods; services
rendered in the Philippines by nonresident
foreign persons are deemed to be rendered
in the course of trade or business; specific
goods and transactions are exempt; in
general, exports of goods and services are
subject to a 0% rate
12.00%
Improperly accumulated earnings tax; levied
on accumulated income of corporations if the
income was accumulated to avoid tax with
respect to the shareholders of the corporation
or other corporations; a corporation serving
as a holding company or investment company
is prima facie evidence of a purpose to avoid
tax with respect to shareholders; publicly
held companies, banks and nonbank financial
intermediaries, and insurance companies
are exempt
10.00%
Fringe benefit tax; applied to the grossed-up
monetary value of fringe benefits received
by managerial and supervisory employees;
the grossed-up monetary value is determined
by dividing the monetary value of the benefit
by 68%; the employer must withhold the tax
and pay it to the tax authorities; the tax does
not apply if the benefit is required for or is
necessary to the trade or business of the
employer or if the benefit is granted for the
convenience of the employer; this tax is
considered to be a final tax
General rate 32.00%
Benefits paid to nonresident alien individuals
who are not engaged in a trade or business
in the Philippines (monetary value of
benefit is divided by 75%)
25.00%
Benefits paid to certain other individuals,
including aliens working for specified
entities (monetary value of benefit is
divided by 85%)
15.00%
Documentary stamp tax
Original issue of all debt instruments;
imposed on issue price.
PHP1 per PHP200
Original issue of stock certificates;
imposed on the par value or the
consideration if no par value
PHP1 per PHP200
Transfer that is not made through a
local stock exchange
PHP0.75 per
PHP200
Bills of exchange or drafts; imposed
on the face value
PHP0.30 per PHP200
Other specified transactions and
documents
Various

Miscellaneous matters

Foreign-exchange controls. The Philippines has adopted liberal foreign-exchange policies. In general, no restrictions are imposed on the repatriation of capital, profits or income earned in the Philippines. Foreign loans and foreign investments may be regis­tered with the Philippine Central Bank (BSP). Only loans regis­tered with the BSP are eligible for servicing through the use of foreign exchange purchased from the banking system. However, the registration of a foreign investment is required only if the foreign exchange needed to service the repatriation of capital and the remittance of dividends, profits and earnings is sourced in the banking system.

Transfer pricing. The method used by a corporation to fix prices must be consistent worldwide.

The Bureau of Internal Revenue (BIR) issued Revenue Regu­lations 2-2013 on Transfer Pricing (TP Regulations) in January 2013. These regulations are largely based on the arm’s-length methodologies prescribed by the Transfer Pricing Guidelines of the Organisation for Economic Co-operation and Development (OECD). The following are significant aspects of the TP Regu­lations:

  • They implement the authority of the Commissioner of Internal Revenue under Section 50 of the Tax Code to review controlled transactions among associated enterprises and to allocate or distribute their income and deductions to determine their ap­propriate revenues and taxable income.
  • They provide the methods of establishing an arm’s-length price.
  • They require the maintenance and safekeeping of the docu­ments necessary for the taxpayer to prove that efforts were ex­erted to determine the arm’s-length price. The TP Regulations apply to both cross-border and domestic transactions between associated enterprises.

Related-party transactions. Related-party transactions must com­ply with the arm’s-length standard. Under certain conditions, a deduction may not be claimed for losses on sales or exchanges of properties or for interest incurred on transactions between related parties. The BIR Commissioner may reallocate gross income or deductions among related entities to prevent manipulation of reported income.

Treaty withholding tax rates

The table below lists the maximum withholding rates for divi­dends, interest and royalties provided under the treaties. Most of the treaties require that the recipient be the beneficial owner of the income for the preferential rates to apply. A tax treaty relief appli­cation must be submitted before a tax exemption or beneficial treaty rate under a tax treaty may be claimed.

Dividends (v)

%

Interest (w)

%

Royalties

%

Australia 25 (a) 15 (b) 25 (c)
Austria 25 (d) 15 (b) 15 (c)(e)
Bahrain 15 (f) 10 15 (t)
Bangladesh 15 (k) 15 15
Belgium 15 (f) 10 15

 

Brazil 25 (i) 15 (b) 25 (g)
Canada 25 (d) 15 (b)(h) 25 (e)(h)
China 15 (f) 10 15 (s)
Czech Republic 15 (f) 10 15 (u)
Denmark 15 (k) 10 15
Finland 15 (r) 15 (b) 25 (c)
France 15 (r) 15 (b) 15
Germany (z) 15 (k) 10 (l) 10 (m)
Hungary 20 (k) 15 15 (e)
India 20 (o) 15 (b) 15 (p)
Indonesia 20 (k) 15 (b) 25 (c)
Israel 15 (f) 10 15 (e)
Italy 15 15 (b) 25 (c)
Japan 15 (d) 10 (b) 10 (c)
Korea (South) 25 (k) 15 (b) 15 (c)
Kuwait 15 (f) 10 (q) 20
Malaysia 25 (i) 15 25 (c)
Netherlands 15 (f) 15 (l) 15 (c)
New Zealand 15 10 (b) 15
Nigeria 15 (x) 15 (q) 20
Norway 25 (d) 15 25 (e)(p)
Pakistan 25 (n) 15 (b) 25 (c)
Poland 15 (k) 10 15
Qatar 15 (f) 10 15
Romania 15 (d) 15 (q) 25 (j)
Russian Federation 15 15 15
Singapore 25 (r) 15 (b) 25 (c)
Spain 15 (d) 15 (l) 15 (c)
Sweden 15 (k) 10 15
Switzerland 15 (f) 10 15
Thailand 15 (r) 15 (b) 25 (c)
United Arab Emirates 15 (f) 10 (q) 10
United Kingdom 25 (d) 15 (b) 25 (c)
United States 25 (r) 15 (b) 25 (c)(e)
Vietnam 15 (k) 15 15
Non-treaty
countries
15/30 (y) 20/30 (y) 20/30 (y)

a) The rate is 15% if a rebate or credit is granted to the recipient.

b) The rate is 10% if the interest is paid with respect to public issues of bonds, debentures or similar obligations (under the United States treaty, with respect to public issues of bonded indebtedness). Under the Austria, Japan and Korea (South) treaties, the 10% rate also applies to interest paid by a Board of Invest­ments (BOI)-registered preferred pioneer enterprise. Under the India treaty, the 10% rate also applies to interest paid to financial institutions, including insurance companies.

c) The rate is 10% (Austria, Japan, Korea (South), Netherlands and Spain) or 15% (Australia, Finland, Indonesia, Italy, Malaysia, New Zealand, Pakistan, Sing apore, Thailand, the United Kingdom and the United States) for royalties paid by a BOI-registered preferred enterprise (under the Austria, Japan and Korea (South) treaties, the enterprise must be a pioneer enterprise). The 15% rate also applies to royalties paid with respect to cinematographic films or tapes for television or broadcasting under the treaties with Finland, Italy, Japan, Malaysia, Singapore, Thailand and the United Kingdom. Under the Spain treaty, the rate is 20% for such royalties. Under the Finland treaty, the rate is also 15% for royalties paid for the use of, or the right to use, copyrights of literary, artistic or scientific works.

d) The rate is 10% (Canada, Japan, Norway, and the United Kingdom, 15%) if the recipient holds 10% (Romania, 25%) of the voting shares of the payer corporation. Under the treaties with Austria and Japan, the rate is also 10% if the payer holds 10% (Japan, 25%) of the total shares issued by the payer dur­ing the six months immediately preceding the dividend payment date. Under the Japan treaty, the rate is also 10% if the dividends are paid by a BOI-registered pioneer enterprise. Under the Romania and Spain treaties, the 10% rate does not apply to partnerships. Under the treaty with Romania, the shares must have been owned for at least two years preceding the date of the divi­dend payment.

e) This rate is subject to the “most-favored-nation” provision of the treaty.

f) The rate is 10% if the recipient of the dividends holds directly at least 10% of the capital of the payer. Under the treaties with Bahrain, Israel, Kuwait, Qatar, Switzerland and the United Arab Emirates, partnerships do not qualify for the 10% rate. Under the treaty with the United Arab Emirates, the divi­dends are exempt from tax if the beneficial owner of the dividends is the government of a contracting state, a local government, a political subdivision, a local authority or any of their governmental institutions or entities.

g) The 25% rate applies to royalties paid for the use of, or the right to use, trademarks, cinematographic films, or films or tapes for television or radio broadcasting. A 15% rate applies to other royalties.

h) This rate applies if the interest payments or royalties are taxable in Canada.

i) A 15% rate applies if the recipient is a company (under the Brazil treaty, a partnership also qualifies). The 25% rate applies in all other cases. Under the Malaysia treaty, the recipient must be subject to tax in Malaysia.

j) The rate is 15% for royalties paid with respect to cinematographic films and tapes for television or broadcasting. The rate is 10% if the payer is registered with the BOI as a preferred pioneer enterprise.

k) The rate is 10% (Hungary and Indonesia, 15%) if the recipient holds directly at least 25% of the capital of the payer. Under the treaties with Bangladesh, Denmark, Germany, Korea (South), Poland, Sweden and Vietnam, a partner­ship does not qualify for the 10% rate. Under the Korea (South) treaty, the 10% rate also applies if the dividends are paid by a BOI-registered preferred pioneer enterprise. The new treaty with Germany (see footnote [z]) provides for a withholding tax of 15% on dividends, which is reduced to 10% or 5% if the beneficial owner is a company other than a partnership and if the follow­ing additional condition is satisfied:

  • The beneficial owner holds directly at least 25% of the capital of the com­pany paying the dividends (rate reduced to 10%).
  • The beneficial owner holds directly at least 70% of the capital of the com­pany paying the dividends (rate reduced to 5%).

(l)   The rate is 10% for interest paid with respect to sales on credit of industrial, commercial or scientific equipment or with respect to public issues of bonds, debentures or similar obligations. Under the Netherlands treaty, the 10% rate also applies to interest on bank loans. Under the new Germany treaty (see footnote [z]), the withholding tax rate on interest is 10%, but no withholding tax applies if any of the following circumstances exist:

  • The interest is paid in connection with the sale of commercial or scientific equipment on credit.
  • The interest is paid in connection with the sale of goods by an enterprise to another enterprise on credit.
  • The interest is paid in consideration of a loan guaranteed by the Federal Republic of Germany with respect to an export or foreign direct investment or it is paid to the government of the Federal Republic of Germany, the Deutsche Bundesbank, the Kreditanstalt fur Wiederaufbau or the DEG mbH.

m) Under the new treaty with Germany (see footnote [z]), the withholding tax on royalties is 10%, and the term “royalties” means payments of any kind re­ceived as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematographic film, any patent, trademark, design or model, plan, secret formula or process, or for informa­tion concerning industrial, commercial or scientific experience. The term “royalties” also includes payments of any kind for the use of or the right to use a person’s name, picture, or any other similar personality rights and payments received as consideration for the registration of entertainers’ or sportspersons’ performances by radio or television.

n) The rate is 15% if the recipient held 25% of the capital of the payer during the two tax years preceding the year of the dividend payment. Partnerships do not qualify for the 15% rate.

o) The rate is 15% if the beneficiary of the dividends owns at least 10% of the shares of the payer.

p) The rate is 10% (India, 15%) if the Philippine payer is registered with the BOI (under the Norway treaty, the enterprise must be a preferred pioneer en­terprise). Under the Norway treaty, the rate is 7.5% for payments for the use of containers.

(q)   Under the treaty with Romania, the rate is 10% for interest paid with respect to sales on credit of industrial, commercial or scientific machines or equip­ment; bank loans; or public issues of bonds, debentures or similar obligations. Under the treaty with the United Arab Emirates, interest is exempt from tax if it is derived with respect to a loan made, guaranteed or insured by the govern­ment of the other contracting state or a political subdivision, local authority or local government, including financial institutions wholly owned by the government or any other instrumentality, as agreed by the contracting states. Under the treaty with Nigeria, interest is exempt if it is derived and benefi­cially owned by the government of the other contracting state or a local authority thereof or an agency or instrumentality of that government or local authority. Under the treaty with Kuwait, the interest is exempt in the following circumstances:

  • It is derived by the government of the other contracting state or a govern­mental institution or other entity thereof as defined in Paragraph 2 of Arti­cle 4 of the treaty.
  • It is derived by an institution or company that is a resident of the other contracting state, and the institution or company’s capital is wholly owned by the government or a governmental institution or other entity thereof, as defined in Paragraph 2 of Article 4 of the treaty and as agreed to by the competent authorities of the two governments.
  • It is paid on loans guaranteed by the government of the other contracting state or a governmental institution or other entity thereof, as defined in Paragraph 2 of Article 4 of the treaty.

r) The 15% rate (France, 10%; United States, 20%) applies if the recipient holds at least 10% (Thailand and Singapore, 15%) of the voting shares of the payer. Under the Finland and France treaties, partnerships do not qualify for the 10% rate. Under the Singapore and United States treaties, the shares must have been owned for at least two tax years preceding the year of the dividend payment.

s) The 15% rate applies to royalties for the use of, or the right to use, copyrights of literary, artistic or scientific works, including cinematographic films or tapes for television or broadcasting. A 10% rate applies to royalties paid for the following:

  • The use of, or the right to use, patents, trademarks, designs or models, plans, secret formulas or processes
  • The use of, or the right to use, industrial, commercial or scientific equipment
  • Information concerning industrial, commercial or scientific experience

t) This rate applies to royalties paid for the use of, or the right to use, copyrights of literary, artistic or scientific works, including cinematographic films or tapes for television or broadcasting. The rate is 10% for other royalties.

u) The 15% rate applies to royalties paid for the use of, or the right to use, copy­rights of cinematographic films, and films or tapes for television or radio broadcasting. A 10% rate applies to royalties paid for the following:

  • The use of, or the right to use, copyrights of literary, artistic or scientific works, with certain exceptions
  • The use of, or the right to use, patents, trademarks, designs or models, plans, or secret formulas or processes
  • The use of, or the right to use, industrial, commercial or scientific equipment
  • Information concerning industrial, commercial or scientific experience

v) A preferential rate of 15% under the National Internal Revenue Code may apply if the recipient’s country of domicile allows a credit for taxes deemed paid in the Philippines equal to 15%. This credit represents the difference between the regular corporate income tax rate of 30% and the 15% preferen­tial rate. The 15% rate also applies if the dividend is not taxed in the recipi-ent’s country of domicile.

w) Under Philippine domestic law, interest on foreign-currency deposits of non­residents is exempt from tax.

x) The rate is 12.5% if the beneficial owner is a company (other than a partner­ship) that holds directly at least 10% of the capital of the paying company.

y) See Section A.

z) The renegotiated treaty with Germany entered into force on 18 December 2015. Under Article 32(2) of the new treaty, it has the following effective dates:

  • For taxes withheld at source, it is effective for amounts paid on or after 1 January 2016.
  • For other taxes, it is effective for taxes levied for periods beginning on or after 1 January 2016.