Worldwide Individual Taxes Summaries——Philippines（2001-2002）
Worldwide Individual Taxes Summaries——Philippines（2001-2002）
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The maximum nontaxable amounts for certain “de minimis” benefits granted to employees have been increased and, for certain items, defined.The exclusion of services performed in the exercise of a profession by registered general professional partnerships, actors, talents, athletes, etcetera under the value added tax system has been further extended to January 1, 2003.
The Bureau of Internal Revenue (BIR) has taken concrete steps to further enhance its computerization program. Employers now ave the option to submit certain employees’ tax information on diskette, while software copies of certain tax forms are now available.
Revenue Regulations (RR) 14-2000 clarified the conditions for availing of tax exemption from the 6% capital gains tax (CGT) on the gains realized from the disposal of an individual’s principal residence. However, the RR added another condition that is not in the Tax Code-that an amount equal to the 6% CGT be deposited in an escrow bank account under an escrow agreement with the concerned tax district officer, to be released only upon certification by the tax officer that the proceeds have been utilized in the acquisition or construction of a new principal residence.
TERRITORIALITY AND RESIDENCE
The Philippines taxes its resident citizens on their worldwide income. Nonresident citizens and aliens, whether or not resident in the Philippines, are taxed only on income from sources within the Philippines.A nonresident alien individual who comes to the Philippines and stays there for more than 180 days during any calendar year will be deemed a nonresident
alien engaged in trade or business in the Philippines. If the aggregate stay in the Philippines during any calendar year does not exceed 180 days, the individual is deemed a nonresident alien not engaged in trade or business in the Philippines.
Employee gross income/An alien, whether resident or not, is taxed on compensation income earned from services rendered in the Philippines, regardless of where payment is made and whether it is remitted into the Philippines. The nonresident alien is not taxed on compensation income from services performed outside the Philippines. Employee gross income,
from the point of view of a nonresident alien engaged in trade or business in the Philippines, includes all payments for services rendered in the Philippines, such as salaries and bonuses.
SoCIAl security contributions and union dues paid by employees are not included in gross income and are exempt from taxation.
Fringe benefits tax/Fringe benefits furnished to managerial and supervisory-level employees by the employer are subject to a final fringe benefits tax (FBT) of 32% on the grossed-up monetary value of the benefits.
Managerial employees are those who may lay down and execute management policies to hire, transfer, suspend, lay off, recall, discharge, assign, or discipline employees. Supervisory employees are those who effectively recommend such managerial actions if the exercise of authority on behalf of the employer is not merely routine or clerical in nature but requires
the use of independent judgment. The FBT is a final tax payable on a calendar quarterly basis by the employer and deductible as part of fringe benefit expense. Benefits subject to FBT are no longer included in employees’ taxable income.
The grossed-up monetary value of a fringe benefit is determined by dividing the actual monetary value of the benefit by 68%. It represents the whole amount of the income realized by the employee, which includes the net amount that has been received plus the amount of fringe benefit tax due from the employee but paid by the employer.
“Fringe benefits” are defined as any goods, services, or other benefits furnished or granted in cash or in kind by an employer to an individual employee, except rank-and-file employees such as, but not limited to, the following.
2. Expense account.
3. Vehicles of any kind.
4. Household personnel, for example, maid, driver.
5. Interest on a loan at less than the market rate (currently set at 12%) to the extent of the difference between the market rate and the actual rate granted.
6. Membership fees, dues, and other expenses borne by the employer for the employee in soCIAl and athletic clubs and similar organizations.
7. Expenses for foreign travel.
8. Holiday and vacation expenses.
9. Educational assistance to the employee and dependents.
10. Premiums for life insurance, health and other non-life insurance, and similar amounts in excess of what the law allows.
As regards housing and motor vehicles, the monetary value of the benefit is equal to 50% of the lease payment or the depreCIAtion value of the property, whichever is applicable.
However, if the housing unit is situated in or adjacent (within 50 meters) to the business premises, the benefit is not taxable.
The following fringe benefits are not taxable.
1. Fringe benefits required by the nature of or necessary to the trade, business, or profession or for the convenience or advantage of the employer.
2. Benefits authorized by and exempted from tax under speCIAl laws.
3. Employer contributions for the benefit of the employee to retirement, insurance, and hospitalization benefit plans.
4. Benefits given to rank-and-file employees, whether or not granted under a collective bargaining agreement. However, these are subject to withholding tax on compensation, unless otherwise tax exempt.
5. De minimis (mall value) benefits as defined in the rules and regulations.Valuation of fringe benefits/In general, if a fringe benefit is granted in money or directly paid for by the employer, the value of the fringe benefit is the amount granted or paid for. If furnished in property and ownership thereof is transferred to the employee, the value of the fringe benefit is the fair market value of the property as determined by the
Commissioner of Internal Revenue, pursuant to his power to prescribe real property values. If the fringe benefit is granted or furnished by the employer in property but ownership is not transferred to the employee, the value of the fringe benefit is equal to the depreCIAtion value of the property.
Taxation of expatriates/Expatriates assigned in certain industries enjoy certain tax concessions. These expatriates include alien executives of offshore banking units, service contractors and subcontractors engaged in oil exploration activities, and regional headquarters and regional operating headquarters of multinational companies, as well as representative offices. They are taxed at 15% on their gross compensation income. The applicable FBT rate, except for representative offices, is also 15%. The grossed-up monetary value is determined by dividing the actual value of the benefit by 85%.
The FBT imposed on fringe benefits enjoyed by nonresident aliens not engaged in trade or business within the Philippines is 25% of the grossed-up monetary value of the fringe benefit. The grossed-up monetary value is determined by dividing the actual value of the benefit by 75%.Capital gains and investment income/Nonresident aliens are taxed on Philippine-source capital gains, irrespective of their period of stay in
the Philippines. The rates are 0.5% of the gross sales for those shares of stocks listed and traded in the stock exchange; 5% on the first PHP100,000 and 10% on the excess of the net capital gains for unlisted shares of stock; and 6% of the higher of the gross sales price or fair market value of real property sold. Capital losses are deductible only from capital gains. In computing net capital gains or losses from other
capital assets, only 50% of the gain or loss is to be taken into account if the capital asset has been held for more than 12 months; otherwise, 100% of the gain or loss is to be considered.
A nonresident alien is also taxed on Philippine-source investment income such as interest, dividends, and royalties at the rate of 20% (for those engaged in trade or business in the Philippines) or 25% (for those engaged in trade or business in the Philippines) final tax (or a lower treaty rate).
The tax is withheld at source, and the income is no longer subject to the graduated rates.
Resident aliens are taxed on their Philippine-source income at graduated rates. However, Philippine-source interest and royalties are taxed at 20%. Interest on residents’ deposits under the expanded foreign-currency deposit system (FCDU accounts) is taxed at 7.5%, while interest on long-term deposits or investment in the form of savings, common or
individual trust funds, and other investments evidenced by certificates, etcetera, is exempt from tax, subject to certain conditions. Royalties on literary works and musical compositions are subject to a final tax of 10%. Dividend income received from a domestic corporation is taxed at 10%. Tax
rates for capital gains from shares of stock and real property are the same as those for nonresident aliens.
Business deductions/Aliens, whether residents or not, who are receiving only salary or compensation income are not allowed any deduction against such income.
In the case of individuals engaged in business or the practice of a profession, the following expenses are allowed as deductions from gross income.
1. All ordinary and necessary expenses paid or incurred during the taxable year in connection with the trade, business, or profession, including raw materials, supplies, and direct labor.
2. Wages and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefits and travel expenses incurred in the pursuit of the trade or profession.
3. Business rentals.
4. Interest paid or incurred within a taxable year in connection with the conduct of a taxpayer’s profession, trade, or business, less an amount equal to a certain percentage of the interest income subject to final tax.
5. Entertainment, amusement, and recreation expenses, not to exceed ceilings prescribed by the Secretary of Finance (none yet as of this writing).
8. Bad debts.
10. Charitable and other contributions, subject to certain limitations.
11. Research and development expenditures.
In lieu of these allowable deductions, an individual other than a nonresident alien may elect a standard deduction not exceeding 10% of gross income.
Nonbusiness expenses/Home mortgage interest, medical expenses,
contributions, and other personal expenses cannot be claimed as deductions for income tax purposes. However, soCIAl security contributions are excluded from gross income.
Personal allowances/Resident aliens and, subject to certain conditions, nonresident aliens engaged in trade or business in the Philippines are allowed a personal exemption of PHP20,000 if single, PHP25,000 if head of the family, and PHP32,000 if married. An additional exemption of PHP8,000 for each dependent child (not to exceed four dependents) is allowed to married individuals. These personal and additional exemptions take the
form of deductions instead of tax credits.
A family with a gross income of not more than PHP250,000 for the year may deduct premium payments for health/hospitalization insurance up to a maximum of PHP2,400.
Aliens deriving income from foreign sources are not allowed a tax credit for foreign income taxes against Philippine income tax.
Social security taxes/The maximum annual soCIAl security and Philhealth contribution payable by a taxpayer for 2000 is PHP5,550.
Local taxes on income/The local governments are not authorized to impose any tax on income.
Returns/For tax purposes, a husband and wife must file one consolidated income tax return, but the tax is computed separately. Income that cannot be definitely attributed or identified as exclusive income of either spouse is divided equally between them. Generally, this results in lower combined tax liability than when the tax is jointly computed.
All individual taxpayers are required to file their returns on a calendar-year basis. The return must be filed on or before April 15 of the succeeding year.
Payment of tax/Generally, the income tax withheld from the salaries or compensation of aliens, resident or not, is equal to their final tax liability on such compensation. If not, the balance must be paid at the time the return is filed. In certain cases, income tax liability may be paid in two equal installments.
Rates of tax on income of aliens, resident or not, depend on the nature of their income, that is, compensation income, income subject to final tax, or other income (see below).
Compensation/For resident aliens and nonresident aliens doing business (as earlier defined) and receiving compensation income, the tax rates are as follows.
Taxable income Tax on Percen