Nationally, taxes are levied and collected pursuant to the National Internal Revenue Code, the Tariff and Customs Code, and other laws. The main types of revenue taxes are income, indirect, excise, documentary stamp and transfer, which are all administered by the Bureau of Internal Revenue (BIR). Local governments also have some autonomy to impose taxes on business and ownership of real property. There is a territorial system of taxation for foreign corporations and individuals, and non-resident citizens. Only Philippine-sourced income is subject to Philippine taxes for the latter. Corporations incorporated under Philippine laws and resident citizens are subject to income tax on worldwide incomes.


The general rate of corporate income tax is 30% on net taxable income. There is a minimum corporate income tax (MCIT) equivalent to 2% of gross income, which applies from the start of the fourth year immediately following the first year of commercial operation. MCIT paid in excess of the regular income tax is allowed as a tax credit against the regular corporate income tax payable in the succeeding three years. The 30% rate also applies to non-resident foreign corporations, but the tax is calculated on gross income. Exemptions apply under tax treaty provisions.

Certain types of income and corporations are subject to special tax rates and are as follows:

• International carriers doing business in the Philippines: 2.5% of gross billings from carriage originating from the Philippines. Lower rates are available under tax treaties. Exemption applies on condition of reciprocity;

• Expanded foreign currency deposit units of banks: 10% on onshore interest income;

• Offshore bank units: 10% on onshore interest income;

• Regional operating headquarters of multinational companies: 10% of net taxable income;

• Regional or area headquarters of multinational companies are exempt. These entities are not allowed to generate income from Philippine sources nor solicit or market goods and services on behalf of their parent company or affiliates. They are authorised to act as supervisory, communications and coordinating centres for their subsidiaries and branches;

• Contractors and subcontractors engaged in petroleum exploration: 8% of gross income in lieu of all other taxes;

• Non-resident foreign owners, lessors or distributors of motion pictures: 25% on gross income;

• Non-resident foreign owners of vessels: 4.5% of gross rental, lease or charter fees from citizens; and

• Non-resident foreign lessors of aircraft, machinery and other equipment: 7.5% on rentals, charter fees and other fees from Philippine sources.

Tax Base

Taxable income is calculated in accordance with the accounting method employed by the company, unless a different tax treatment is provided under the law or regulation. Differences in financial and tax reporting on the recognition of income and expenses are recognised as reconciling items on the income tax return.


In general, all expenses incurred in connection with the conduct of business can be claimed as deductions when calculating net income subject to tax. The Tax Code lists the following types of allowable deductions, in addition to cost of sales or service: ordinary and necessary expenses; interest; taxes; losses; bad debts; depreciation; depletion of oil and gas wells and mines; charitable and other contributions; research and development; and employee pension trusts. Deductibility of certain expenses is subject to some limitations. The interest expense shall be reduced by an amount equivalent to 33% of the company’s interest income that is subject to final tax. Interest paid by corporations to a majority individual owner or shareholder is non-deductible. Likewise, interest expenses are not allowed as a tax expense if paid to a personal holding company that is more than 50% owned by a majority shareholder of the corporation. Entertainment and recreation expenses are limited to 0.5% and 1% of net revenue for taxpayers engaged in selling goods and services, respectively. Research and development expenses may be claimed as a deduction during the year in which they are incurred. The taxpayer has an option to amortise the expense over a period of not less than 60 months, beginning with the month when the benefits from such expenditure were realised.

Income tax paid in a foreign country by a domestic corporation on foreign-sourced income may be claimed as a deductible expense. Alternatively, the company may opt to claim the foreign tax as a tax credit against Philippine income tax proportionate to the Philippine income tax due on such income.

Property losses sustained in relation to the business and not indemnified by insurance or other means are deductible from gross income. The net operating loss incurred in a taxable year, except under income tax holidays, can be carried forward to the three succeeding taxable years. Capital losses can be offset only against capital gains. Losses from wash sales of stock or securities are not deductible.

Contributions to a BIR-qualified employee pension trust are deductible to the extent of the contribution needed to cover the pension liability accruing during the taxable year. The excess amount over the current service cost shall be apportioned equally over a period of 10 years. For non-qualified plans, only actual payouts during the year are deductible. Expenses must be substantiated, with official receipts for services and invoices for goods. Expenses will be disallowed as a deduction if the prescribed withholding tax on payments made for such expenses is not withheld and remitted to the tax authorities.

Corporations may claim an optional standard deduction (OSD) at 40% of gross income in lieu of the itemised deductible expenses. The option to claim the OSD may be changed every year, but the choice, once made in the first quarter, is irrevocable for the taxable year.

Tax Year

A corporation may choose a calendar or fiscal year for its taxable year, depending on which schedule more accurately reflects its taxable income. Prior approval from the Commissioner of Internal Revenue is required to change the accounting period.

Company Group

For tax purposes, each company is an independent entity and must file and pay its own taxes. The filing of consolidated tax returns or the relieving of losses within a group of companies is not allowed. The commissioner may allocate revenues and expenses between related companies to prevent tax evasion or to correctly reflect each entity’s income. In 2013 the Philippines issued a transfer pricing regulation specifying the methodology to be used to determine the arm’s-length price and the documentation required to show compliance with the arm’s-length standard in related-party transactions. The documentation shall be submitted to the tax authorities on notification.

Corporate Returns

Domestic and resident foreign corporations must file their quarterly income tax returns within 60 days after the end of each taxable quarter. They must also file a final adjusted return on or before the 15th of the fourth month following the end of the tax year. The quarterly and annual returns cover the regular income tax, the MCIT and income subject to special tax regimes. Non-resident foreign corporations are not required to file income tax returns, as taxes due on their Philippine-sourced income are withheld at source by the Philippine firm making the payment.

Excess income taxes paid during the year may be applied for refund or the amount may be carried over to the succeeding quarter or year. The latter option is irrevocable for that tax year and no application for cash refund or tax credit certificate is allowed. Tax credit certificates may only be used to pay for certain direct internal revenue tax liabilities of the holder, and cannot be transferred or assigned to any person.


The improperly accumulated earnings tax (IAET) is a penalty that is levied against closely held corporations for the unreasonable accumulation of its earnings resulting in the non-distribution of dividends to shareholders and, consequently, to defer payment of the dividend tax. The IAET is imposed at 10% of the improperly accumulated taxable income in excess of the amount necessary to cover the reasonable needs of the business, which, under existing regulations, is limited to 100% of the paid-up capital of the corporation. The accumulated taxable income is inclusive of accumulations taken from other years. Paid-up capital refers to the par value, excluding any premium paid. Banks, insurance companies, publicly held corporations and companies registered with and enjoying preferential tax treatment in special economic and freeport zones are not covered by the IAET. The IAET is due one year and 15 days following the close of the tax year, and is covered by a separate tax return.


Dividends from a domestic corporation are tax-exempt in the hands of other domestic corporations. The tax is 10% if these are paid to citizens and residents, and 25% if paid to non-residents not engaged in business in the Philippines. Dividends received by domestic corporations from foreign corporations form part of the income subject to regular corporate tax. Dividends received by non-resident foreign corporations from domestic corporations are taxed at 30% or the treaty rate. A lower rate of 15% applies if the recipient’s home country does not impose a tax on foreign-sourced dividends or when there are tax-sparing provisions.

A 15% tax rate also applies on the remittance of profits of Philippine branches to their foreign head office. The tax is based on total profits that are applied to remittance without any deduction for the tax component. The tax is generally not waived even if the profits for remittance are reinvested in the Philippines. Branches registered in special economic zones are exempt from this tax. Preferential rates of branch profits remittance tax are available under treaties.

Passive Income

Royalties payable to non-resident foreign corporations are subject to the 30% final withholding tax. A lower rate of 25% is imposed on non-resident foreign nationals. Interest on foreign loans paid to non-resident foreign corporations is taxed at 20%. Preferential rates are available under tax treaties. Scheduled rates apply on most passive income:

• Interest from bank deposits, yields from deposit substitutes and similar arrangements, royalties, prizes and other winnings from Philippine sources: 20%, (winnings of P10,000 ($198) or less are exempt);

• Interest from foreign currency deposits in a local bank: 15% (non-residents are exempt);

• Interest income of individuals from long-term deposits is exempt;

• Gains from the sale of shares through the local exchange: exempt from income tax, but subject to a transaction tax at 0.6% of the selling price;

• Capital gains from the sale of land and buildings classified as capital assets: 6% of the gross selling price or market value, whichever is higher (not applicable to non-resident foreign individuals and corporations); and

• Capital gains from the sale of shares in a domestic corporation, not traded through the local stock exchange by individuals and domestic corporations: 15% Gains from the sale of capital assets other than land, buildings and shares in domestic corporations are taxed as business income. For individuals, only 50% of the gain is taxed if the asset is held for over 12 months. Capital losses are deductible to the extent of the capital gains.


Foreign nationals and non-residents are only subject to income tax on Philippine-sourced income; only resident citizens are taxed on global income. New graduated rates ranging 0-35% apply to citizens, resident aliens and non-resident aliens staying in the Philippines for over 180 days in a year. The 0% rate applies on income of P250,000 ($4940) and below. Employees receiving only the statutory minimum wage are exempt from income tax on their basis salary, holiday, hazard, overtime and night differential pay. If engaged in business or the practice of a profession, the net taxable income is calculated in the same manner as that for corporations. The 40% OSD for individuals is, however, based on gross revenues. Self-employed individuals whose annual gross receipts do not exceed P3m ($59,300) have the option of an 8% tax on gross sales or receipts in lieu of the graduated income tax rates, the 12% value-added tax (VAT) or the 3% percentage tax. Non-resident foreign nationals not doing business in the country are taxed at a rate of 25% on Philippine-sourced income, including wages, rents, gains, interest and dividends.

Individual Returns

For individuals, the tax year is the calendar year and the annual income tax is due on or before April 15 of the following year. Tax liabilities of spouses are calculated separately, although spouses are required to file their tax returns jointly. Self-employed individuals also file a quarterly income tax return. Individuals filing annual income tax returns are required to disclose the amounts and sources of other income that is exempt from tax or already subjected to final taxes. This requirement is optional on the part of the individual starting on tax year 2016. For employees receiving only compensation income, employers are relied upon to fully withhold the income tax by the end of the year. Employees qualifying under the substituted filing scheme are exempt from filing income tax returns. Non-resident aliens not engaged in business are not required to file an income tax return.

Withholding Taxes

Most income is subject to withholding of taxes. If corporate or individual payers are classified as top withholding agents, they must withhold on all payments for the purchase of goods (1%) and services (2%). Withholding taxes on income subject to the regular corporate rate are creditable against the calculated liability. Most passive income is subject to final withholding taxes. For corporate taxpayers, this is disclosed as income no longer subject to regular income tax. Income payments to non-resident foreign corporations are also withheld at the source as final taxes. Hence, non-resident foreign corporations are not required to file annual income tax returns.

Indirect Taxes

A 12% VAT is imposed on the gross selling price on sale, barter or exchange of goods and properties, as well as on gross receipts from the sale of services within the Philippines, including the lease of properties. The 12% VAT paid on the company’s purchases relative to its business subject to VAT is credited against the 12% VAT due on gross sales or receipts. The net amount is the VAT payable by the company.

Exports are subject to 0% VAT and are entitled to claim a refund for VAT that has been paid on purchases of goods, properties and services relating to the product. Exempt status is granted to certain transactions and entities. In such cases, VAT paid on the inputs cannot be claimed as creditable input VAT. Instead, the VAT paid forms part of the deductible costs of the business.

A VAT taxpayer files monthly remittance forms and quarterly returns that serve as the final adjusted return for the period. The VAT on services performed in the Philippines by non-resident foreign corporations, as well as the VAT on royalties and rentals payable to non-resident foreign corporations, is withheld by the paying local company. Imports are subject to VAT unless specifically exempted. VAT is paid whether or not the importer conducts business. Percentage taxes on gross receipts apply to most services and transactions not subject to VAT, such as carriers of passengers on land (3%); international carriers (3%); franchisees of gas and water utilities (2%); banks and non-bank financial firms (1%, 5% or 7%); life insurance companies and agents of foreign insurance firms (5%); and sale of shares through initial public offerings (1%, 2% or 4% of the selling price).

Excise Taxes

In addition to VAT, excise taxes are imposed on the following items: alcohol, tobacco and petroleum products; automobiles; mineral products; non-essential goods including jewellery, precious stones, perfumes, yachts and other sport vessels; sweetened beverages; and some cosmetic procedures.

Documentary Stamp Tax

A documentary stamp tax is required for certain documents, transactions or instruments specified in the Tax Code when the obligation or right arises from Philippine sources or when the property is situated in the Philippines. These include foreign bills of exchange (0.3%); sale of real property (1.5% of the fair market value); original issuance of shares (1% of par value); sale of shares, except those listed and traded on the local stock exchange (0.75% of par value); debt instruments (0.75%); and lease agreements (0.2% of the total lease over the lease period).

Tax Audit

Tax authorities may audit companies and assess deficiency taxes three years from the date of filing of the final return. If fraud is alleged, this period may extend to 10 years from the date of discovery of the possible fraud. The deficiency tax may be collected within five years from the date when the assessment becomes final. Assessments may be contested in courts.

Recovery of Taxes

In the case of excessively or erroneously paid taxes, a taxpayer may apply for a refund or the issuance of tax credit certificates within two years from the date of payment. For purposes of the creditable taxes withheld, the option to carry forward the excess credits generated shall be irrevocable once chosen. A VAT-registered taxpayer may apply for refund of any excess VAT when the taxpayer shifts to a non-VAT activity or ceases to be in business, or when such input taxes arise from zero-rated sales. There are also prescriptive periods in claiming tax refunds.

Bookkeeping Requirements

All business entities subject to internal revenue taxes are required to maintain books of account. These consist of a journal, a ledger and subsidiary records required for the business. Entities subject to VAT are also required to keep subsidiary sales and purchase journals. Books of accounts and other accounting records may be kept in either English or Spanish. The books and records must be preserved for at least 10 years. Companies with gross quarterly sales or receipts exceeding P3m ($59,300) shall have their books audited and examined on an annual basis by independent certified public accountants who should be accredited as tax agents by the BIR.

For public companies, banks and insurance companies, the independent certified public accountants should further be accredited by sector regulatory agencies, such as the Securities and Exchange Commission (SEC), the Bangko Sentral ng Pilipinas (the central bank) or the Insurance Commission. Financial statements are required to be filed with annual income tax returns. In addition to maintaining books of accounts, the Corporation Code requires businesses to keep records of all business transactions, the minutes of any meetings of shareholders and directors, and a stock and transfer book. Sales should be evidenced by BIR-authorised official receipts and invoices based on the prescribed format. The books may be in manual or digital form, and must be registered with the tax authorities prior to their use. Large taxpayers are mandated to adopt a computerised accounting system.

Financial Reporting

The amended Securities Regulation Code (SRC) Rule 68 issued by the Philippine SEC prescribed a financial reporting framework or set of accounting principles, standards, interpretations and pronouncements, which must be adopted in the preparation and submission of the annual financial statements of a particular group of entities. The following paragraphs outline the financial reporting framework prescribed by SRC Rule 68 for each group of entities.

Large and/or publicly accountable entities are those with total assets exceeding P350m ($6.9m) or total liabilities of more than P250m ($4.9m). Other entities covered by SRC Rule 68 include those required to file financial statements under Part II of SRC Rule 68 (for example, an issuer that has sold a class of securities pursuant to registration under Section 12 of the SRC, an issuer with a class of securities listed for trading on an exchange, and an issuer with assets of at least P50m ($988,000) and 200 or more shareholders each holding at least 100 shares of a class of equity securities); entities in the process of issuing securities to the public market; or entities that are holders of secondary licences issued by regulatory agencies. Entities qualifying in any of the criteria provided above shall use Philippine Financial Reporting Standards (PFRS) as their financial reporting framework. However, another set of reporting rules may be permitted by the SEC for certain regulated entities, such as banks and insurance companies. The PFRS are adopted by the Financial Reporting Standard Council (FRSC) from the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), and approved by the Philippine Board of Accountancy.

Small and medium-sized enterprises (SMEs) are defined as entities with total assets of between P3m ($59,300) and P350m ($6.9m), or total liabilities between P3m ($59,300) and P250m ($4.9m). If the entity is a parent company, amounts will be based on consolidated figures. Other entities classified as SMEs are as follows: those not required to file financial statements under Part II of SRC Rule 68; entities not in the process of issuing securities to the public market; and entities that are not holders of secondary licences issued by regulatory agencies. Entities that qualify based on the above criteria shall use the PFRS for SMEs as their financial reporting framework, which is adopted by the FRSC from the IFRS for SMEs issued by the IASB. Except for those allowed under SRC Rule 68 to apply PFRS, the SEC requires mandatory adoption of PFRS for SMEs for entities that qualify as SMEs. Micro entities are considered to be those with total assets and liabilities below P3m ($59,300); entities not required to file financial statements under Part II of SRC Rule 68; entities not in the process of offering securities to the public; and entities that do not hold secondary licences issued by regulatory agencies.

Micro entities may choose to use the income tax basis or PFRS for SMEs, provided that the financial statements include the statement of management’s responsibility, auditor’s report, statement of financial position, statement of income and notes to financial statements, all of which cover the two-year comparative periods, if applicable.

Relief From Double Taxation

Relief from double taxation is available for Philippine-sourced income received by non-resident foreign nationals and corporations under the tax treaties with Australia, Austria, Bahrain, Bangladesh, Belgium, Brazil, Canada, China, the Czech Republic, Denmark, Finland, France, Germany, Hungary, India, Indonesia, Israel, Italy, Japan, South Korea, Kuwait, Malaysia, the Netherlands, New Zealand, Nigeria, Norway, Pakistan, Poland, Qatar, Romania, Russia, Singapore, Spain, Sweden, Switzerland, Thailand, Turkey, the UAE, the UK, the US and Vietnam.

To avail of the relief from double taxation pursuant to tax treaties, foreign nationals must file a tax treaty relief application, or Certificate of Residence for Tax Treaty Relief Form.


Customs duties are generally imposed on articles imported into the Philippines at various rates. Certain imports may be exempt or conditionally exempt, subject to certain situations, while some imports are specifically prohibited. The basis for calculation of the duties is the transaction value, which is subject to adjustments for certain costs. The VAT and excise taxes for imports are also collected by the Bureau of Customs.


The local government code provides for the maximum tax rates that the Local Government Unit may impose on business activities in their jurisdiction. Property tax is imposed at 1-2%, but the base differs depending on use. For commercial and industrial properties, the tax base is 50% of the its market value. The base is 40% for agricultural properties and 20% for residential properties.


Entities registered in special economic zones (i.e. Philippine Economic Zone Authority) enjoy an income tax holiday of up to eight years, after which a preferential gross income tax rate of 5% is imposed in lieu of all national and local taxes. The purchase of enterprises in special economic zones is automatically zero-rated for VAT. Certain imports are also free from duties and taxes.