Tax returns and compliance

Tax rates

Residence rules

Termination of residence

Economic employer approach

Types of taxable compensation

Tax-exempt income

Health insurance

Expatriate concessions

Salary earned from working abroad

Taxation of investment income and capital gains

Additional capital gains tax (CGT) issues and exceptions

General deductions from income

Tax reimbursement methods

Calculation of estimates/prepayments/withholding

Relief for foreign taxes

General tax credits

Sample tax calculation

All income tax information is summarized by R.G. Manabat & Co., the Philippine member firm of KPMG International, based on the Republic of the Philippines Bureau of Internal Revenue.

When are tax returns due? That is, what is the tax return due date?

The Philippine Annual Income Tax Return (BIR Form 1700) is filed and taxes are due to the Philippine Bureau of Internal Revenue on or before 15 April of the year following the applicable calendar year.

What is the tax year-end?

The tax year is a calendar year which ends 31 December of each year.

What are the compliance requirements for tax returns in the Philippines?

Every individual citizen, alien residing in the Philippines, and every non-resident alien engaged in trade or business in the Philippines, who is receiving income, whether it constitutes the sole source of their income or in combination with salaries, wages, and other fixed or determinable income, is required to file an income tax return on or before 15 April of each year covering income for the preceding taxable year. The tax year runs from 1 January to 31 December of each year. The tax return to be filed declares the total amount of income earned by the individual and any unpaid tax is settled at the time the return is filed. A citizen or a resident alien is not required to file the annual individual income tax return if they qualify for the substituted filing. A non-resident alien engaged in trade or business, however, does not qualify for substituted filing.

Substituted filing applies to citizens or resident individuals who meet all the following conditions:

• the employee receives purely compensation income
• the employee receives the income from one employer in the Philippines
• the amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer
• the employee's spouse, if earning income, also complies with all the three conditions stated earlier
• the employer files the Annual Information Return of income Taxes Withheld on Compensation and Final Withholding Taxes (BIR Form Nos. 1604C and 1604F)
• the employer issues the Certificate of Compensation Payment/Tax Withheld (BIR Form 2316) to each employee.

Tax returns need not be filed by the following categories of individual:

• those earning purely compensation income whose taxable income does not exceed two hundred fifty thousand pesos (250,000.00 Philippine peso (PHP))
• those whose sole income has been subjected to final withholding tax such as interest, prizes, winnings, royalties, and dividends
• non-resident aliens not engaged in trade or business on their compensation income
• minimum wage earners as defined under the Tax Code.

What are the current income tax rates for residents and non-residents in the Philippines?

The income tax rates on employment income and from a business or exercise of a profession are as follows.

Income tax table for January 01, 2018 to December 31, 2022

Same graduated rates apply as per section above, except non-resident aliens not engaged in trade or business in the Philippines which are subject to a flat rate of 25 percent based on gross income.

For the purposes of taxation, how is an individual defined as a resident of the Philippines?

For tax purposes, an individual may be classified as one of the following:

• resident citizen
• non-resident citizen
• resident alien
• non-resident alien engaged in trade or business
• non-resident alien not engaged in trade or business.

A resident citizen is taxable on all income derived from worldwide sources. For the other categories, the individual is taxable only on income derived from sources within the Philippines. For employment income, the source of income is the place where the services are rendered, regardless of the place or manner of payment, the place where contract was negotiated, or the payer’s place of residence.

A non-resident alien is deemed engaged in trade or business if, in any calendar year, they stay in the Philippines for an aggregate period of more than 180 days. If the non-resident alien individual’s stay for an aggregate period of 180 days or less during any calendar year, then they are deemed not to be engaged in trade or business.

For resident citizens, non-resident citizens, resident aliens, and non-resident aliens engaged in trade or business, income tax is calculated on the basis of net taxable income at graduated rates ranging from 0 percent to a maximum of 35 percent. (Please see the discussion on General Deductions from Income for what constitutes net taxable income.)

Non-resident aliens not engaged in trade or business are subject to tax at 25 percent of their gross income.

Is there, a de minimus number of days rule when it comes to residency start and end date? For example, a taxpayer can’t come back to the host country/jurisdiction for more than 10 days after their assignment is over and they repatriate.

Aliens on assignment in the Philippines for a period of more than 2 years are generally considered as residents at the start of their assignment in the Philippines and remain as such until departure from the Philippines at the end of the assignment.

What if the assignee enters the country/jurisdiction before their assignment begins?

If the assignee arrives in the Philippines prior to their assignment, their actual days spent in the Philippines (that is, physical presence in the Philippines) will determine their residency/non-residency status, notwithstanding the start date of their Philippine assignment.

Are there any tax compliance requirements when leaving the Philippines?

An alien who has acquired a resident status in the Philippines for tax purposes retains such tax status until they actually depart from the Philippines at the end of their assignment. There are no special requirements to be observed for tax purposes on leaving the Philippines other than those described in the section above.

What if the assignee comes back for a trip after residency has terminated?

If the assignee comes back to the Philippines after their residency status in the Philippines has terminated, the determination of their new residency status will commence from the day the individual actually arrives in the country/jurisdiction.

Do the immigration authorities in the Philippines provide information to the local taxation authorities regarding when a person enters or leaves the Philippines?

No. However the two agencies may coordinate on certain transactions such as visa renewal. The immigration authorities may also require the submission of income tax return filed with the tax authorities.

Do the taxation authorities in the Philippines adopt the economic employer approach to interpreting Article 15 of the Organisation for Economic Co-operation and Development (OECD) treaty? If no, are the taxation authorities in the Philippines considering the adoption of this interpretation of economic employer in the future?

Yes, the economic employer approach is being adopted by tax authorities such that when there is a recharge of remuneration cost to the Philippine entity, then the host entity is considered to be the economic employer and the employee cannot claim tax exemption, regardless of the duration of their stay in the Philippines.

Are there a de minimus number of days before the local taxation authorities will apply the economic employer approach? If yes, what is the de minimus number of days?

None. Theoretically, the compensation charged to the local employer is taxable to the employee regardless of the number of days they are present in the Philippines during the fiscal year.

What categories are subject to income tax in general situations?
 

Gross compensation income is defined as taxable income arising from an employer/employee relationship and includes the following:

• salaries, wages, compensation, commissions, emoluments, and honoraria
• bonuses and other benefits exceeding PHP90,000
• allowances for transportation, representation, entertainment, and other similar items
• fees (including director’s fees paid to a director who is at the same time an employee of the payer)
• taxable pensions
• taxable retirement pay
• other income of a similar nature, including compensation paid in-kind.

Intra-group statutory directors

Will a non-resident of the Philippines who, as part of their employment within a group company, is also appointed as a statutory director (i.e. member of the Board of Directors in a group company situated in the Philippines) trigger a personal tax liability in the Philippines, even though no separate director's fee/remuneration is paid for their duties as a board member?

a)   Will the taxation be triggered irrespective of whether or not the board member is physically present at the board meetings in the Philippines?

No.

b)  Will the answer be different if the cost directly or indirectly is charged to/allocated to the company situated in the Philippines (i.e. as a general management fee where the duties rendered as a board member is included)?

Yes, the director’s fees constitute an income for the Board of Directors (BOD), and as such, subject to income taxes. For tax purposes, the tax rates would depend on whether or not the BOD serves as a Director only or as a Director and employee of the company.

c)   In the case that a tax liability is triggered, how will the taxable income be determined?

Generally, the amount recharged to the Philippine entity is taxable regardless of the number of days they are present in the Philippines during the year.

Are there any areas of income that are exempt from taxation in the Philippines? If so, please provide a general definition of these areas.

Gross income subject to tax does not include the following:

• Proceeds of life insurance policies
• Amount received by insured as return of premium
• gifts, bequests, and devises
• compensation for injuries or sickness
• income exempt under treaty
  retirement benefits, pensions, and gratuities, etc.
• Miscellaneous items:
  • Income derived by foreign government
  • Income derived by the government or its political subdivisions
  • prizes and awards exempted by law
  • prizes and awards in sports competition
  • 13th month pay and other benefits subject to the PHP90,000 limit
  • GSIS, SSS, Medicare and other contributions
  • Gains from sale of bonds, debentures, or other certificate of indebtedness with a maturity of more than 5 years
  • Gains from redemption of shares in mutual fund.

Housing allowances provided to expatriates are generally considered as fringe benefits subject to FBT. If the housing allowance is higher than the actual rent, the excess is considered as part of compensation subject to withholding tax on compensation.

The full amount of the utilities paid by the employer to or on behalf of the employee is a taxable fringe benefit. 

The full amount of the LAFHA paid by the employer to or on behalf of the employee is taxable compensation subject to withholding tax on compensation.

The grossed-up tax is included in the taxable compensation of the expatriate-employee.

Airfare and other transportation expenses incurred by the taxpayer for moving from old post to new post (such as the Philippines) as well as the costs of shipment of household goods and personal effects are generally exempt from tax, subject to certain substantiation requirement. On the other hand, moving allowance or unsubstantiated expenses are taxable.

The full amount of the home leave paid by the employer to or on behalf of the employee is a taxable fringe benefit.

The cost of the educational assistance to the employee which is borne by the employer shall, in general, be treated as taxable fringe benefit. However, a scholarship grant to the employee by the employer shall not be treated as taxable fringe benefit if the education or study involved is directly connected with the employer's trade, business or profession, and there is a written contract between them that the employee is under obligation to remain in the employ of the employer for period of time that they have mutually agreed upon. In this case, the expenditure shall be treated as incurred for the convenience and furtherance of the employer's trade or business.

The cost of educational assistance extended by an employer to the dependents of an employee shall be treated as taxable fringe benefits of the employee unless the assistance was provided through a competitive scheme under the scholarship program of the company.

13th-month pay and other benefits such as productivity incentives and Christmas bonus up to ninety thousand pesos (PHP90,000) are considered an exclusion from gross income. The portion thereof in excess of PHP90,000 forms part of taxable compensation.

Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and productivity incentive schemes shall be considered as de minimis benefits not subject to income tax provided that the total annual monetary value received from both CBA and productivity incentive schemes combined do not exceed ten thousand pesos (PHP10,000) per employee per taxable year.

If the employer lends money to their employee free of interest or at a rate lower than 12 percent per year, such interest foregone by the employer or the difference of the interest assumed by the employee and the 12 percent interest rate shall be treated as a taxable fringe benefit.

A cash auto-allowance provided to the employee will form part of their taxable compensation income unless it is shown that the allowance is used by the employee in the performance of their duties, in which case the allowance is considered as ordinary and necessary business expense of the company.

The cost of life or health insurance and other non-life insurance premiums borne by the employer for the group insurance of their employees are treated as non-taxable fringe benefit and likewise not included in the taxable compensation of the employee.

Are there any concessions made for expatriates in the Philippines?

None.

Is salary earned from working abroad taxed in the Philippines? If so, how?

Citizens who are working abroad are generally considered non-resident citizens of the Philippines and hence are exempt from Philippine income tax on salary earned from working abroad as well as other income from foreign-sources. An alien individual, whether resident or not of the Philippines, is taxable only on income from sources within the Philippines; hence, aliens are exempt from Philippine income tax on salaries earned from working abroad.

Are investment income and capital gains taxed in the Philippines? If so, how?

Business income, which is a broadly defined term covering all gains, profit and income of whatever kind and in whatever form derived from any source within the Philippines is generally taxable at graduated tax rates of 0 percent to 35 percent.

Gains arising from the disposal of capital assets are also subject to income tax. Capital assets are defined as property held by the taxpayer (whether or not connected with their trade or business), but do not include stock-in-trade of the taxpayer or other similarly held property or property used in trade or business of the taxpayer, real or personal, which may be subject to allowance for depreciation.

If the property which is disposed of by a taxpayer has been held for not more than 12 months, the gain is taxed in full. If held for more than 12 months, only 50 percent of the gain is subject to tax.

The following capital gains are not subject to a holding period and are subject to special capital gains tax rates:

• capital gains realized from the sale, exchange, or disposition of shares of stock in any domestic corporation are subject to a final tax rate of 15 percent.
• on shares of stock listed and traded through a local stock exchange, the rate is 0.006 percent of the gross selling price.
• capital gains from the sale of real property located in the Philippines classified as capital assets by individuals are subject to a capital gains tax of 6 percent based on gross selling price or the current fair market value, whichever is higher at the time of sale.

On sources from within the Philippines, certain passive income like interest from any Philippine currency bank deposit and yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements, royalties, prizes exceeding PHP10,000, and other winnings are subject to a final withholding tax of 20 percent. The tax is 25 percent if the recipient is a non-resident alien not engaged in trade or business.

Dividends from a domestic corporation or the share of an individual partner in a partnership subject to tax received by citizens and residents are subject to income tax at 10 percent and 25 percent if the recipient is a non-resident alien not engaged in trade or business.

Interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of 15 percent of such interest income. Provided that interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax. Provided further that should the holder of the certificate pre- terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof.

On rental income, please see previous discussion under the taxation of investment income and capital gains.

Generally, gains from stock option exercise are considered as taxable if they are attributable to services rendered in the Philippines. Gains derived from stock options granted to managerial and supervisory employees shall be treated as fringe benefit subject to fringe benefit tax. On the other hand, the gain shall be subjected to income tax if the recipient is a rank and file employee.

Moreover, for migrating rank and file and non-rank and file employees, a portion of the income from the exercise of stock option would be considered as taxable subject to Philippine income tax and fringe benefit tax, respectively, if at any time during the period between the grant and vesting dates, the employees had performed personal services in the Philippines (such as assigned in the Philippines).

In relation to business income of the taxpayer, only those that are realized are taxable gains and tax deductible losses. 

See discussion on capital gains from sale of real property under the taxation of investment income and capital gains.

Losses resulting from the sale or exchange of capital assets shall be allowed as deduction only to the extent of the gains from such sales or exchanges.

See discussion on gains arising from the disposal of capital assets under the taxation of investment income and capital gains. 

Gifts are subject to donor's tax. The tax is levied, assessed, collected and paid upon the transfer by any person, resident, or non-resident, of the property by gift, at a flat rate of six percent on total donations for gifts above PHP250,000 yearly regardless of relationship to the donor.

Are there additional capital gains tax (CGT) issues in the Philippines? If so, please discuss?

None.

Are there capital gains tax exceptions in the Philippines? If so, please discuss?

The Philippines has tax treaties with several countries/territories. Under these tax treaties, capital gains derived by residents of the other contracting states from the alienation of properties (other than immovable properties) are not taxable in the Philippines.

Not applicable.

Not applicable.

What are the general deductions from income allowed in the Philippines?

Net taxable income is determined by deducting the allowable deductions from gross income. For individual taxpayers who earn solely compensation income, they are entitled to deduct from their gross earnings the PHP90,000 maximum exclusion of their 13th month pay and other benefits.

Individuals deriving business income are allowed to deduct all the ordinary and necessary expenses paid or incurred in carrying on or which are directly attributable to the carrying on of the development, management, operation, and/or conduct of their trade, business, or profession.

What are the tax reimbursement methods generally used by employers in the Philippines?

Most multinational companies in the Philippines adopt the tax equalization policy on their inbound and/or outbound assignees.

There are no tax estimates/prepayments in the Philippines. Generally, the employer withholds taxes upon payment of the compensation to the employee based on a graduated withholding tax table with rates from 0 percent to 35 percent on net taxable compensation, effective 1 January 2018.

The Philippines adopts the pay-as-you-file system with regard to income taxes.

When the tax due is in excess of PHP2,000, the individual taxpayer may elect to pay the tax in two equal installments. The first installment shall be paid at the time the return is filed (on or before 15 April) and the second installment is paid on or before 15 October following the close of the calendar year.

When are estimates/prepayments/withholding of tax due in the Philippines? For example: monthly, annually, both, and so on.
 

Local employers are responsible for the withholding and remittance of the correct amount of tax from the compensation income of their employees. The tax withheld has to be remitted to the BIR within 10 days after the close of each calendar month, except for the withholding tax for the month of December, which must be paid not later than 15 January of the following year, to the authorized agent bank or collection agent of the BIR. However, if the local employer is enrolled under the Electronic Filing and Payment System (EFPS), the deadline for electronically filing the applicable withholding tax returns and paying the taxes due thereon shall be 5 days later than the deadline set above. If the employer fails to withhold and remit the correct amount of tax, such tax shall be collected from the employer together with the penalties or additions to the tax otherwise applicable.

The local employer is required to report the amount of compensation income tax withheld for the year using BIR Form 1604CF (Annual Information Return of Income Tax Withheld on Compensation and Final Withholding Taxes) on or before 31 January of the year following the taxable year.

The amount of taxes withheld by the employer is creditable against the annual income tax due of the employee.

Is there any Relief for Foreign Taxes in the Philippines? For example, a foreign tax credit (FTC) system, double taxation treaties, and so on?
 

In case of tax resident citizens of the Philippines, the amount of income taxes paid during the taxable year to any foreign country/jurisdiction may be used as credits against Philippine income taxes.

The Philippines has tax treaties with 43 countries/jurisdictions. There are complex regulations and rates vary depending upon the status of the recipient and the nature of the income. Tax treaty relief, however, is not automatic. A tax treaty relief application process should be complied with.

What are the general tax credits that may be claimed in the Philippines? Please list below.

Tax credits that may be claimed in the Philippines are:

• compensation income tax withheld by the employer
• income taxes paid by resident citizens to any foreign country/territory.

This calculation assumes a married taxpayer resident in the Philippines with two children whose 3-year assignment begins 1 January 2018 and ends 31 December 2020. The taxpayer’s base salary is 100,000 US dollars (USD) and the calculation covers 3 years.

Exchange rate used for calculation: USD1 = PHP50. 

• All earned income is attributable to local sources.
• Bonuses are paid at the end of each tax year, and accrue evenly throughout the year.
• Interest income is not remitted to the Philippines.
• The company car is used for business and private purposes and originally cost USD50,000.
• The employee is deemed resident throughout the assignment.
• Tax treaties and totalization agreements are ignored for the purpose of this calculation.

Calculation of taxable income

* Net of non-taxable portion of bonus amounting PHP90,000

Calculation of tax liability

• Housing allowance, home leave, company car and education allowance are subject to Fringe Benefit Tax (FBT), which is a tax borne by the employer.
• Moving expense reimbursement is an exempt income of the employee. The employer can claim the same as a business expense, subject to the substantiation requirements.
• Interest income from non-local sources (that is, foreign-source) is nontaxable income to an alien individual.