Types of Taxes in the Philippines

Understanding the different types of taxes in the Philippines is essential for anyone living or doing business in the country. 

Taxes play a vital role in the economy and contribute to the development of infrastructure, public services, and social welfare programs. From income tax to value-added tax, there are various taxes imposed by the government. 

Whether you’re an individual taxpayer or a business owner, this comprehensive guide will equip you with the knowledge needed to navigate the world of Philippine taxes effectively.

Kinds of Taxes in the Philippines

In the Philippines, there are several types of taxes that individuals and businesses need to be aware of. These taxes are collected by the Bureau of Internal Revenue (BIR) and are used to fund government services and projects.

Below are the different types of taxes in the Philippines payable to the BIR:

• Income Tax – This is a tax on the income earned by individuals, corporations, partnerships, and other entities. The amount of tax to be paid is based on the taxpayer’s net income.  This can be Corporate Income Tax or Income Tax as an individual. 
• Value Added Tax (VAT) – This is a tax on the sale of goods and services in the Philippines. The current VAT rate is 12%. 
• Excise Tax – This is a tax on specific goods such as alcohol, tobacco, and petroleum products. The amount of tax to be paid depends on the type and quantity of the product.  
• Capital Gains Tax – This is a tax that is imposed on the gain presumed to have been realized by the seller for any sale, exchange and/or disposition of capital asset (including other forms of conditional sales/pacto de retro sales) in the Philippines. 
• Documentary Stamp Tax – This is a tax on documents such as contracts, deeds, and other legal documents. The tax rate varies depending on the nature of the document.
• Percentage Tax – This is a tax on a person or juridical entities engaged in business/trade that sells lease goods, properties or services whose gross annual sales or receipts do not exceed 3 million and are not VAT registered in the Philippines.
• Withholding Tax – This is a corporate tax imposed on taxpayers engaged in any trade or business in the Philippines. This tax is withheld from the salary of every employee by the employer which will serve as an advanced payment for Income Taxes during a business year.
• Donor’s Tax – This is a tax on gifts and donations. The donor is responsible for paying this tax. 

Below are other types of taxes in the Philippines payable to the City Treasurer or Municipal Treasurer:

• Real Property Tax (RPT) – This is a tax on real property such as land, buildings, and houses. The tax rate is based on the assessed value of the property.
• Business Tax – This is essentially, a tax by the local government unit on businesses operating within its locality
• Transfer Tax – This is a tax levied by the local government everytime there is a transfer of real property

Philippine Income Tax

In the Philippines, everyone who earns an income is required to pay income tax. This includes both employees and entrepreneurs. Employees who earn a compensation income of more than P250,000 per year are required to pay income tax, while self-employed individuals and entrepreneurs are required to file and pay income tax based on their net taxable income, which is calculated by deducting allowable deductions from their gross income.

It’s important to note that even if you earn less than the minimum amount required to pay income tax, you are still required to file an income tax return if you fall under any of the following categories:

• Have two or more employers in a year
• A non-resident citizen or alien employed in the Philippines
• A resident citizen who earned income from a foreign source
• An individual who is required to file an annual income tax return for purposes of claiming any tax refund or tax credit

If you are a corporation, the corporate income tax can be 20% or 25% depending on your status. You may also enjoy an income tax holiday or zero-tax for the time being if your company is registered with PEZA or BOI, or with other ecozones. 

Philippine Value-Added Tax (VAT)

Value-Added Tax (VAT) is a type of consumption tax that is levied on the value added at each stage of the production process. It is a widely used tax system around the world, including in the Philippines. VAT is designed to be a tax on the end consumer, meaning that businesses are only responsible for collecting and remitting the tax to the government on behalf of their customers.

It is a form of indirect tax that is levied on the consumption of goods and services. In the Philippines, VAT is imposed on the sale, barter, exchange, or lease of goods and properties, as well as the sale or exchange of services. It is also levied on the importation of goods.

There are three types of VAT/Non-VAT Transactions used in the Philippines: 

• the standard rate of 12% and;
• the zero-rated
• VAT exempt

The 12% VAT rate is applied to most goods and services sold in the country, including imported goods. On the other hand, the zero-rate applies to certain goods and services, such as exports, foreign currency denominated sales, and sales to international organizations.

The current VAT rate is 12%. Some transactions may, however, be exempt or zero rated.

Registered businesses in the Philippines are required to be VAT-registered if their gross annual sales or receipts exceed Php 3,000,000.00. VAT-registered businesses are required to issue VAT official receipts or invoices, file VAT returns, and remit VAT payments to the Bureau of Internal Revenue (BIR) on a monthly or quarterly basis, depending on their gross annual sales or receipts.

Zero-rated means that the goods and services are subject to a 0% value-added tax (VAT), effectively exempting them from the VAT, but allowing VAT-registered businesses to claim input tax credits on their purchases related to these zero-rated items.

The following are some examples of transactions that are zero-rated in the Philippines:

• Export of goods and services
• Sales of goods and services to economic zones or freeport zones
• Sales of raw materials to registered export-oriented enterprises
• Sales of agricultural products, marine and forest products, and by-products to registered VAT-registered businesses
• Sales of medicine prescribed for diabetes, hypertension, and high cholesterol
• Sales of educational services and books
• Sales of socialized and low-cost housing

VAT exemption means that these goods and services are not subject to the standard 12% Value-Added Tax (VAT) in the country:

• Sale or importation of agricultural and marine food products in their original state, livestock, and poultry of a kind generally used as, or yielding or producing foods for human consumption.
• Sale or importation of fertilizers, seeds, seedlings, fingerlings, fish, and poultry feeds.
• Services rendered by agricultural contract growers and milling for others of palay into rice, corn into grits, and sugar cane into raw sugar.
• Medical, dental, hospital, and veterinary services, including services rendered by professionals.
• Educational services, both private and public.
• Services rendered by individuals pursuant to an employer-employee relationship.
• Services rendered by regional or area headquarters established in the Philippines by multinational corporations that act as supervisory, communications, and coordinating centers for their affiliates, subsidiaries, or branches.
• Export sales and services.
• Sales of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business.

Philippine Excise Tax

Excise tax is a form of indirect tax imposed on certain goods and services that are considered non-essential or harmful to public health and the environment.

Excise tax is levied on a wide range of products, including tobacco, alcohol, petroleum, automobiles, and even sugar-sweetened beverages. The purpose behind imposing such taxes is manifold. It serves as a means to discourage excessive consumption, promote public health, protect the environment, and contribute to sustainable economic development.

• Firstly, one of the most common types of goods subject to excise tax is tobacco products, including cigarettes, cigars, and other tobacco preparations. The government imposes excise tax on these products to discourage smoking and promote public health.
• Another category of goods subject to excise tax is alcoholic beverages. This includes beer, wine, and spirits. The government aims to control and regulate the consumption of alcoholic beverages through the imposition of excise tax while also generating revenue.
• Additionally, petroleum products are also subject to excise tax. This includes gasoline, diesel, kerosene, and other similar products. The government imposes excise tax on petroleum products to ensure a stable and sustainable source of funding for infrastructure projects and other government initiatives.
• Sugary beverages are also subject to excise tax in the Philippines. This includes carbonated drinks, sweetened juices, energy drinks, and other similar beverages. The aim is to promote healthier beverage choices and discourage excessive sugar consumption.
• Lastly, there are other goods and services subject to excise tax, such as automobiles, motorcycles, and certain non-essential goods. These additional taxes are imposed to regulate the consumption of luxury items and generate revenue for the government.

The rates and regulations surrounding excise tax in the Philippines are determined by the government to achieve various objectives. For instance, higher excise taxes on tobacco and alcohol aim to reduce the prevalence of smoking and excessive drinking, while also generating funds for health programs and rehabilitation efforts. On the other hand, excise taxes on petroleum products are designed to manage fuel consumption and support infrastructure development.

Philippine Documentary Stamp Tax (DST)

The Documentary Stamp Tax (DST) is a tax levied on various documents and instruments that are signed, issued, or transferred in the Philippines. 

The tax is imposed on the documents, not on the transactions or the properties involved. The tax is due upon the issuance or transfer of the document and must be paid before the document can be legally effective or enforceable. Basically, it is a tax on documents, instruments, loan agreements, and papers evidencing the acceptance, assignment, sale, or transfer of an obligation, right, or property. 

Some of the common transactions that require DST payment are the following:

• Deeds of sale or conveyances of real property
• Original issuance of shares of stocks, Deeds of sale or conveyances of stock
• Promissory notes and loan agreements
• Lease agreements
• Insurance policies
• Bonds, debentures, and other certificates of indebtedness
• And other similar documents

Some of the transactions exempt from DST include loans granted by international agencies such as the World Bank, Asian Development Bank, and International Monetary Fund. The transfer of real property between government entities is also covered by the exemption. Additionally, there are some exemptions for certain types of securities transactions, including government securities, stock transactions, and Philippine Depository Receipts (PDRs).

Philippine Percentage Tax

Philippine Percentage Tax is a tax levied on businesses with an annual gross sales or receipts not exceeding PHP 3,000,000. It is a business tax that is calculated based on the gross sales or receipts of the business for the taxable quarter or month. 

It is a tax that is imposed on businesses or individuals who sell goods or services in the country. This tax is only applicable to those whose gross sales or receipts do not exceed the amount of P3,000,000 in a year. If your business exceeds this amount, then you are required to pay the regular business tax instead. The Percentage Tax rate is 3% of the gross sales or receipts of the business. 

According to the Bureau of Internal Revenue (BIR), the following are the goods and services subject to Percentage Tax:

• Sale of goods – This includes goods sold, bartered, or exchanged, as well as goods used in the course of business. This includes those sold through consignment arrangements or those sold through auction.
• Services – This covers all services rendered in the course of business, including those rendered by individuals, partnerships, corporations, and associations.
• Use or lease of properties – This covers the lease of properties, including those used in the course of business, such as equipment, machinery, and other assets.

Philippine Withholding Tax (WT)

Withholding tax is a form of tax that is withheld or deducted from the income of an individual or entity by the person or company making the payment. This means that the tax is collected at the source of the income, rather than at the time of filing the tax return.

The main objective of the withholding tax system is to ensure that the government receives a portion of the income of taxpayers on a regular basis, which helps to provide a steady stream of revenue for the government. 

In the Philippines, withholding tax is levied on a wide range of income, including salaries, wages, commissions, and professional fees, among others. The rate of withholding tax varies depending on the nature of the income and the relationship between the payer and the payee.

There are several types of withholding taxes in the Philippines:

• The first type of withholding tax is the expanded withholding tax (EWT), which is imposed on certain income payments, such as fees for technical services, rentals, and royalties. This type of tax is withheld by the payer (usually the client or customer) and remitted to the Bureau of Internal Revenue (BIR) on behalf of the payee (usually the service provider or lessor).
• The second type of withholding tax is the final withholding tax (FWT), which is imposed on certain passive income, such as interest income from bank deposits and investments, dividends, and capital gains from the sale of stocks. This type of tax is withheld by the paying institution (such as a bank or stockbroker) and remitted directly to the BIR.
• The third type of withholding tax is the creditable withholding tax (CWT), which is imposed on certain income payments, such as compensation, professional fees, and sales of goods and services. This type of tax is withheld by the payer and can be credited against the income tax liability of the payee.
• Lastly, there is the withholding tax on government money payments (WTGMP), which is imposed on certain payments made by the government to its suppliers, contractors, and service providers. This type of tax is withheld by the government agency making the payment and remitted to the BIR.

Philippine Property Taxes

Property tax, also referred to as real property tax, is a form of tax imposed on the ownership of land, buildings, and other improvements. It is a local tax levied by the city or municipality where the property is located. The revenue generated from property tax plays a vital role in funding local government services such as infrastructure development, public schools, healthcare facilities, and other community programs.

The amount of property tax you owe is primarily based on the assessed value of your property. The assessment process involves the valuation of your property according to its market value, considering factors such as location, size, improvements, and other relevant characteristics. Once the assessed value is determined, a specific tax rate is applied to calculate the property tax amount.

Property tax in the Philippines is usually paid annually, and the payment deadline may vary depending on the Local Government Code (LGC).

Each type of property tax has its own purpose and calculation method. Let’s take a closer look at the different types:

• Real Property Tax (RPT): Real Property Tax is the most common type of property tax in the Philippines. It is imposed on land, buildings, and other improvements. The value of the property, as determined by the local government unit (LGU), is the basis for calculating the RPT. This tax is collected annually and is used to fund local government projects and services.
• Transfer Tax: Transfer Tax, also known as the Documentary Stamp Tax, is levied on the transfer of ownership of real property. It is typically paid by the buyer upon the transfer of the property title. The tax rate varies depending on the location and value of the property being transferred.

Philippine Capital Gains Tax (CGT)

Capital Gains Tax (CGT) is a tax imposed on the gains or profits that arise from the sale or disposition of capital assets in the Philippines. This tax is applicable to both individuals and corporations, and it is important to have a clear understanding of its rules and regulations to ensure compliance with the law.

CGT is primarily imposed on the sale or disposition of real properties such as land, buildings, and other improvements. However, it is also applicable to the sale of shares of stock not traded through the local stock exchange, as well as other types of capital assets.

The tax rate for CGT varies depending on the type of asset being sold and the length of time it has been held. For example, the tax rate for the sale of real properties is generally 6% of the gross selling price or fair market value, whichever is higher. On the other hand, the tax rate for the sale of shares of stock is 15% of the net capital gains, which is the difference between the selling price and the cost of acquisition.

For the Real Property, capital gains tax is calculated by multiplying the 6% capital gains tax from the selling price or the zonal value multiplied by the square meter, whichever is higher. In this type of asset, the acquisition cost is irrelevant. 

For Shares of Stock, the capital gains tax is calculated by subtracting the acquisition cost or the cost basis of the asset from the selling price. The resulting amount represents the profit or gain made from the transaction. It is important to note that capital gains are realized only when the asset is actually sold or disposed of. Until then, any increase in the value of the asset is considered unrealized gains.

It is also worth noting that there are certain exemptions and exclusions from capital gains tax in the Philippines. For instance, there is a sale of the family home and the proceeds shall be used to purchase a replacement of another family home. So long as it complies with the BIR  rules and regulations, e.g. must be spent within 18 months and the entirety of the proceeds has been used to purchase the family home, no capital gains shall be paid. There are also tax-free exchanges of property under certain conditions which allows sellers to suspend payments of capital gains for the meantime.  

Different types of assets subject to capital gains tax:

• Real Property: One of the main types of assets subject to capital gains tax is real property. This includes land, buildings, condominium units, and other structures attached to the land. Whether you’re selling a residential property, commercial property, or agricultural land, any gain you make from the sale will be subject to capital gains tax.
• Shares of Stock: Another type of asset subject to capital gains tax is shares of stock. If you sell or transfer shares of stock in a domestic corporation, the profit or gain you earn from the transaction will be subject to capital gains tax. This applies to both listed and unlisted shares of stock.

Philippine Donor’s Tax

Donor’s tax is a tax imposed on any gift, donation, or transfer of property or rights by an individual who is still alive to another individual, whether it be his/her relative or not. 

Under Philippine law, the donor’s tax is imposed on the total fair market value of the property or right being donated, which means that the tax will be computed based on the property’s current worth or zonal value, whichever is higher, not the amount that was originally paid for it.

This tax is imposed by the government to prevent any attempts to avoid the future estate tax, which is a tax imposed on the transfer of property from a deceased individual’s estate to his/her heirs. The donor’s tax is also imposed to generate revenue for the government, which will be used for public services and other government projects.

It is a type of tax imposed on the transfer of property, real or personal, whether in money or in kind, whether or not in consideration. In the Philippines, the donor’s tax is imposed on the person making the donation or the donor. The tax is based on the fair market value of the property at the time of the donation.

It’s important to note that the donor’s tax is separate and distinct from the estate tax, which is imposed on a person’s net estate at the time of their death. The donor’s tax is imposed on the transfer of property while the estate tax is imposed on the transfer of property at death. To learn more about Estate Tax, you may visit our article.

In the Philippines, donor’s tax is imposed on both residents and non-residents who donate property located in the Philippines. It’s important to keep in mind that if the donor is a non-resident alien, the tax is imposed only on the property located in the Philippines. 

Donor’s tax is a tax imposed on the transfer of property by way of gift. In the Philippines, the donor’s tax rate is 6% on the fair market value of the property at the time of donation, subject to certain exemptions and deductions. One of the exemptions is the donation made to the government, political subdivisions, or any entity created by any of them for public purpose. This means that if you donate a property to the government or a government entity, you are exempted from paying donor’s tax.

Another exemption is the donation made to certain institutions, such as educational, charitable, and religious institutions. These institutions must be accredited by the Philippine government to be eligible for the exemption. If you donate a property to these institutions, you are also exempted from paying donor’s tax.

In addition to the exemptions, there are also deductions that can be applied to the donor’s tax. One of the deductions is the standard deduction, which is a fixed amount that can be deducted from the fair market value of the property donated. The standard deduction is Php 250,000 for donations for the year. 

Need further information and assistance regarding Taxation Laws? Talk to our team at Duran & Duran-Schulze Law to know more about the requirements and process. Call us today at (+632) 8478 5826 or +63 917 194 0482, or send an email to info@duranschulze.com for more information.