Last modified: 19/12/2024 23:03

Corporate taxation

I. For General Professional Partnership – 0%

II. Domestic Corporations

Type of Corporation	The Higher between the “Regular” or “Minimum Corporate Income Tax (MCIT) rate”
	Regular		MCIT
	Rate	Effectivity	Rate	Effectivity
Domestic corporations, in general	25%	July 1, 2020	1%	July 1, 2020  to June 30, 2023
			2%	July 1, 2023
For corporations with net taxable income not exceeding Five Million Pesos (5,000,000) AND total assets not exceeding One Hundred Million (100,000,000), excluding land on which the particular business entity’s office, plant and equipment are situated	20%	July 1, 2020	1%	July 1, 2020  to June 30, 2023
			2%	July 1, 2023
Proprietary Educational Institutions and Hospitals	1%	July 1, 2020  to June 30, 2023	Not Applicable
	10%	July 1, 2023

A Minimum Corporate Income Tax of 2% or 1% of the gross income as of the end of taxable year shall be imposed on both domestic and foreign corporation.

1. 1% – July 1, 2020 to June 30, 2023 (as amended by CREATE law)​
2. 2% – July 1, 2023 onwards

• The term ‘gross income’ shall be equivalent to gross sales less sales returns, discounts and allowances and cost of goods sold.  ‘Cost of goods sold’ shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.​
• If apart from deriving income from core business activities there are other items of gross income realized or earned by the taxpayer which are subject to the normal corporate income tax, must be included as part of gross income for computing MCIT.​
• This means that the term “gross income” will also include all items of gross income enumerated under Section 32(A) of the Tax Code, except: (a) Income exempt from income tax and (b) Income subjected to final withholding tax.

Certain Passive Income of Domestic Corporations	Tax Rate
1. Interest from currency deposits, trust funds, deposit substitutes and similar arrangements received by domestic corporations	20%
2. Royalties from sources within the Philippines	20%
3. Interest Income from a Depository Bank under Expanded Foreign Currency Deposit System	15%
Interest income from foreign currency loans granted by a depository bank under Expanded Foreign Currency Deposit System to residents other than depository banks under the expanded system	10%
4. Cash and Property Dividends received by a domestic corporation from another domestic corporation	0%
5. Capital gains from the sale, exchange or other disposition of lands and/or building	6%
6. Net Capital gains from sale of shares of stock not traded in the stock exchange	15%

III. For Resident Foreign Corporation 

Income	Tax Rate
1) a. In General – on taxable income derived from sources within the Philippines	25%
b. Minimum Corporate Income Tax – on gross income
July 1, 2020 to June 30, 2023	1%
July 1, 2023 onwards	2%
2) International Carriers – on gross Philippine billings	2 ½ %
3) Regional Operating Headquarters of Multinational Companies– on taxable income	25%
4) Regional or Area Headquarters of Multinational Companies	exempt
5) Corporation Covered by Special Laws	Rate specified under the respective special laws
6) Offshore Banking Units (OBUs)	10%
In general – Income derived by OBUs from foreign currency transactions with non-residents, other OBUs, local commercial banks and branches of foreign banks authorized by BSP	Exempt
On interest income derived from foreign currency loans granted to residents other than offshore banking units or local commercial banks, local branches of foreign banks authorized by BSP to transact business with OBUs	10%
7) Income derived under the Expanded Foreign Currency Deposit System
Interest income derived by a depository bank under the expanded foreign currency deposit system.	15%
On Income derived by depository banks under the expanded foreign currency deposit systems from foreign currency transactions with non-residents, OBUs in the Philippines, local commercial banks including branches of foreign banks that may be authorized by BSP	exempt
On interest income derived from foreign currency loans granted by depository banks under the expanded foreign currency deposit systems to residents other than offshore banking units in the Philippines or other depository banks under the expanded system	10%
8. Branch Profit Remittances – on total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippines Economic Zone Authority)	15%
9. Interest from currency deposits, trust funds, deposit substitutes and similar arrangements	20%
10. Royalties derived from sources within the Philippines	20%

IV. For Non-Resident Foreign Corporations

Income	Tax rate
1. In general – on taxable income derived from sources within the Philippines	25%
2. Nonresident Cinematographic Film Owner, Lessor or Distributor – on gross income	25%
3. Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals – gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority	4.5%
4. Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment – on gross rentals or fees	7.5%
5. Interest on Foreign Loans – on the amount of interest on foreign loans contracted on or after August 1, 1986	20%
6. Intercorporate Dividends – on the amount of cash and/or property dividends received from a domestic corporation	15%
7. Net Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange	15%

Residence: Types of Corporate Taxpayers: • Corporations including partnerships, no matter how created or organized. • Domestic corporations receiving income from sources within and outside the Philippines • Foreign corporations receiving income from sources within the Philippines • Estates and trusts engaged in trade or business

Taxable income: Income means all wealth which flows into the taxpayer other than as a mere return of capital. Taxable income means the pertinent items of gross income specified in the Tax Code as amended, less the deductions, if any, authorized for such types of income, by the Tax Code or other special laws. Gross income means all income derived from whatever source. Gross income includes, but is not limited to the following:

• Compensation for services, in whatever form paid, including but not limited to fees, salaries, wages, commissions and similar items • Gross income derived from the conduct of trade or business or the exercise of profession

• Gains derived from dealings in property

• Interest

• Rents

• Royalties

• Dividends

• Annuities

• Prizes and winnings

• Pensions

• Partner’s distributive share from the net income of the general professional partnerships Gross income excludes the following:

• Life insurance

• Amount received by insured as return of premium

• Gifts, bequests, and devises

• Compensation for injuries or sickness

• Income exempt under treaty

• Retirement benefits, pensions, gratuities, etc.

• Miscellaneous items

a) Income derived by foreign government

b) Income derived by the government or its political subdivision

c) Prizes and awards in sport competition

d) Prizes and awards which met the conditions set in the Tax Code

e) 13th month pay and other benefits not exceeding P90,000

f) GSIS, SSS, Medicare and other contributions

g) Gains from the sale of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years

h) Gains from redemption of shares in mutual fund

i) Income derived from sale of gold pursuant to RA No. 7076

Corporate taxation: compliance

Filing and payment: A. BIR Form 1702 Deadline: On or before 15th Day of the fourth month following the close of the taxpayer’s taxable year Taxpayer: Annual Income Tax Return (For Corporations and Partnerships) B. BIR Form 1702 AIF Deadline: On or before 15th Day of the fourth month following the close of the taxpayer’s taxable year Taxpayer: Account Information Form (For Corporations and Partnerships) C. BIR Form 1702Q Deadline: 60th day following the close of each of the quarters of the taxable year Taxpayer: Quarterly Income Tax Return (For Corporations and Partnerships)

Taxation of individuals

I. For Individual Citizens and Resident Aliens Earning Purely Compensation Income and Individuals Engaged in Business and Practice of Profession

• Graduated Income Tax Rates under Section 24(A)(2) of the Tax Code of 1997, as amended by Republic Act No. 10963 

Amount of Net Taxable Income		Rate
Over	But Not Over
–	P250,000	–
P250,000	P400,000	15% of the excess over P250,000
P400,000	P800,000	P22,500 + 20% of the excess over P400,000
P800,000	P2,000,000	P102,500 + 25% of the excess over P800,000
P2,000,000	P8,000,000	P402,500 + 30% of the excess over P2,000,000
P8,000,000		P2,202,500 + 35% of the excess over P8,000,000

• For Purely Self-Employed Individuals and/or Professionals Whose Gross Sales/Receipts and Other Non-Operating Income Do Not Exceed the VAT Threshold of P3,000,000, the tax shall be, at the taxpayer’s option.
  1. 8% Income Tax on Gross Sales or Gross Receipts in Excess of P250,000 in Lieu of the Graduated Income Tax Rates and the Percentage Tax; Or
  2. Income Tax Based on the Graduated Income Tax Rates

• For Individuals Earning Both Compensation Income and Income from Business and/or Practice of Profession, their income taxes shall be:
  1. For Income from Compensation: Based on Graduated Income Tax Rates; and
  2. For Income from Business and/or Practice of Professionn
     • If the total Gross Sales/Receipts Do Not Exceed VAT Threshold of P3,000,000, the Individual Taxpayer May Opt to Avail:
       1. 8% Income Tax on Gross Sales/Receipts and Other Non-Operating Income in Lieu of the Graduated Income Tax Rates and the Percentage Tax; Or
       2. Income Tax Based on Graduated Income Tax Rates
     • If the total Gross Sales/Receipts Exceed VAT Threshold of P3,000,000
       1. Income Tax Based on Graduated Income Tax Rates

• On Certain Passive Income of Individual Citizens and Resident Aliens

Passive Income	Tax Rate
1. Interest from currency deposits, trust funds and deposit substitutes	20%
2. Royalties (on books as well as literary & musical compositions)	10%
– In general	20%
3. Prizes (P10,000 or less )	Graduated Income Tax Rates
– Over P10,000	20%
4. Winnings (except from PCSO and Lotto amounting to P10,000 or less )	20%
–   From PCSO and Lotto amounting to P10,000 or less	exempt
5. Interest Income from a Depository Bank under the Expanded Foreign Currency Deposit System	15%
6. Cash and/or Property Dividends received by an individual from a domestic corporation/ joint stock company/ insurance or mutual fund companies/ Regional Operating Headquarter of multinational companies	10%
7. Share of an individual in the distributable net income after tax of a partnership (except GPPs)/ association, a joint account, a joint venture or consortium taxable as corporation of which he is a member or co-venture	10%
8. Capital gains from sale, exchange or other disposition of real property located in the Philippines, classified as capital asset	6%
9. Net Capital gains from sale of shares of stock not traded in the stock exchange	15%
10. 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)	Exempt
Upon pre-termination before the fifth year, there should be imposed on the entire income from the proceeds of the long-term deposit based on the remaining maturity thereof:
Holding Period
– Four (4) years to less than five (5) years	5%
– Three (3) years to less than four (4) years	12%
– Less than three (3) years	20%

II. For Non-Resident Aliens Engaged in Trade or Business 

Income	Tax Rate
A. Tax Rate in General – on taxable income from all sources within the Philippines	same manner as individual citizen and resident alien individual
B. Certain Passive Income
1. Interest from currency deposits, trust funds and deposit substitutes	20%
2. Royalties (in general)	20%
on books as well as literary & musical compositions	10%
On cinematographic films	25%
3. Prizes (P10,000 or less )	Graduated Income Tax Rates
– Over P10,000	20%
4. Winnings (except from PCSO and Lotto)	20%
–  From PCSO and Lotto	exempt
5. Cash and/or Property Dividends received from a domestic corporation/ joint stock company/ insurance/ mutual fund companies/ Regional Operating Headquarter of multinational companies	20%
6. Share of a non-resident alien individual in the distributable net income after tax of a partnership (except GPPs) of which he is a partner or from an association, a joint account, a joint venture or consortium taxable as corporation of which he is a member or co-venture	20%
7. 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)Upon pre-termination before the fifth year, there should be imposed on the entire income from the proceeds of the long-term deposit based on the remaining maturity thereof:Holding Period	Exempt
– Four (4) years to less than five (5) years	5%
– Three (3) years to less than four (4) years	12%
– Less than three (3) years	20%
8. Capital from the sale, exchange or other disposition of real property located in the Philippines classified as capital asset	6%
9. Net Capital gains from sale of shares of stock not traded in the Stock Exchange	15%

III. For Non-resident Aliens Not Engaged in Trade or Business

Income	Tax Rate
1. Gross amount of income derived from all sources within the Philippines	25%
2. Capital gains from the exchange or other disposition of real property located in the Philippines	6%
3. Net Capital gains from the sale of shares of stock not traded in the Stock Exchange	15%

IV. For Alien Individuals Employed by Regional Headquarters (RHQ) or Area Headquarters and Regional Operating Headquarters (ROH) of Multinational Companies, Offshore Banking Units (OBUs), Petroleum Service Contractor and Subcontractor – Graduated Income Tax

Residence: Type of Individual Taxpayers

1. Resident citizens receiving income from sources within or outside the Philippines

o Employees deriving purely compensation income from two or more employers, concurrently or successively at any time during the taxable year

o Employees deriving purely compensation income regardless of the amount, whether from a single or several employers during the calendar year, the income tax of which has not been withheld correctly (i.e. tax due is not equal to the tax withheld) resulting to collectible or refundable return o Self-employed individuals receiving income from the conduct of trade or business and/or practice of profession

o Individuals deriving mixed income, i.e., compensation income and income from the conduct of trade or business and/or practice of profession

o Individuals deriving other non-business, non-professional related income in addition to compensation income not otherwise subject to a final tax o Individuals receiving purely compensation income from a single employer, although the income of which has been correctly withheld, but whose spouse is not entitled to substituted filing

2. Non-resident citizens receiving income from sources within the Philippines

3. Aliens, whether resident or not, receiving income from sources within the Philippines

Taxable income: Income means all wealth which flows into the taxpayer other than as a mere return of capital. Taxable income means the pertinent items of gross income specified in the Tax Code as amended, less the deductions, if any, authorized for such types of income, by the Tax Code or other special laws. Gross income means all income derived from whatever source. Gross income includes, but is not limited to the following:

• Compensation for services, in whatever form paid, including but not limited to fees, salaries, wages, commissions and similar items

• Gross income derived from the conduct of trade or business or the exercise of profession

• Gains derived from dealings in property

• Interest

• Rents

• Royalties

• Dividends

• Annuities

• Prizes and winnings

• Pensions

• Partner’s distributive share from the net income of the general professional partnerships

Gross income excludes the following:

• Life insurance

• Amount received by insured as return of premium

• Gifts, bequests, and devises

• Compensation for injuries or sickness

• Income exempt under treaty

• Retirement benefits, pensions, gratuities, etc.

• Miscellaneous items

a) Income derived by foreign government

b) Income derived by the government or its political subdivision

c) Prizes and awards in sport competition

d) Prizes and awards which met the conditions set in the Tax Code

e) 13th month pay and other benefits not exceeding P90,000

f) GSIS, SSS, Medicare and other contributions

g) Gains from the sale of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years

h) Gains from redemption of shares in mutual fund

i) Income derived from sale of gold pursuant to RA No. 7076

Deductions and allowances: A. Optional Standard Deduction

• An amount not exceeding 40% of the gross sales/receipts for individuals and gross income for corporations.

• Used in lieu of the itemized allowable deductions.

• A taxpayer who elected to avail of the OSD shall signify in his/its return such intention, otherwise he/it shall be considered as having availed of the itemized deductions.

• Once the election to avail of the OSD is signified in the return, it shall be irrevocable for the taxable year for which the return is made.

• A taxpayer is, not allowed to use a hybrid method of claiming its/his deduction for one taxable year.

• Check the appropriate box in the ITR filed for the first quarter.

• Once the election is made, the same type of deduction must be consistently applied for all the succeeding quarterly returns and in the final ITR for the taxable year. The failure to indicate the election to avail of the OSD shall be considered as having availed of the itemized deductions.

• The election to avail of the OSD or itemized deduction as signified in the return shall be irrevocable for the taxable year. Any subsequent amendment of such income tax return filed for the first/initial quarter of the taxable year shall not affect the irrevocable character of the election to avail of the OSD or itemized deduction, as the case may be.

B. Itemized Deductions – Ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to the development, management, operation and/or conduct of the trade, business or exercise of a profession which include the following:

a. Ordinary and necessary business expenses, in general

i. Salaries, wages, and other forms of compensation for personal services, actually rendered, including the grossed-up value of fringe benefit furnished or granted by the employer to the employee

ii. Rentals and/or other payments which are required as a condition for the continued use or possession of property to which the taxpayer has not taken or is not taking title

iii. Travel expenses, here and abroad, while away from home in the pursuit of trade, business or profession

iv. Entertainment, Amusement and Recreation Expenses incurred in entertaining guests and employees in order to develop a better business yielding to a better operating income, which is subject to limit:

 For taxpayers engaged in the sale of goods/properties – 0.50% of net sales (i.e., gross sales less sales returns/allowances and sales discounts)

 For taxpayers engaged in the sale of services (including exercise of profession and use or lease of properties) – 1% of net revenues (i.e., gross revenues less discounts)

 For taxpayers engaged in both sale of goods/ properties and services – apportionment formula as follows: Net Sales/Net Revenues

——————————————- x EAR Expenses

Total Net Sales and Net Revenues

v. Training Expenses Upon the effectivity of CREATE Law, an additional deduction from taxable income of one-half (½) of the value of labor training expenses incurred for skills development of enterprise-based trainees enrolled in public senior high schools, public higher education institutions, or public technical vocational institutions and duly covered by an apprenticeship agreement under the Labor Code of the Philippines, shall be granted to enterprises.

Provided, further, that for the additional deduction for enterprise-based training of students from public educational institutions, the enterprise shall secure proper certification from the DEPED, TESDA, or CHED. Provided, finally, that such deduction shall not exceed ten percent (10%) of direct labor wage (RR No. 5-2021). Requisites for deductibility in general:

1. Must be ordinary and necessary;

2. Paid or incurred during the taxable year;

3. Connected with trade, business or practice of profession;

4. Supported by sufficient evidence;

5. Not against the law, morals, public policy or public order;

6. It must have been subjected to withholding tax, if applicable.

b. Interest – amount paid for the borrower’s use of money during the term of the loan. Below are the requisites for deductibility of interest:

1. An indebtedness exists.

2. The interest has been paid or incurred.

3. The indebtedness must be that of the taxpayer.

4. The indebtedness is connected with the taxpayer’s trade, business or exercise of profession.

5. The interest was paid or incurred during the taxable year.

6. The interest is stipulated in writing.

7. The interest is legally due.

8. The indebtedness is not between related taxpayers.

9. The interest was not incurred to finance petroleum explorations.

10. If incurred on an indebtedness to acquire property, the interest was not treated as a capital expenditure.

Limitations on Deductibility:

 The amount of deductible interest shall be reduced by an amount equal to 20% of interest income earned which had been subjected to final withholding tax. (For domestic corporations that will qualify for lower CIT rate of 20%, interest expense limitation shall not apply.)

Section 4 (c) of Revenue Regulations No. 13 – 2000 SECTION 4. Rules on the Deductibility of Interest Expense. — (c) Interest on Unpaid Taxes. — Provisions of Sec. 4(b) hereof to the contrary notwithstanding, interest incurred or paid by the taxpayer on all unpaid business-related taxes shall be fully deductible from gross income and shall not be subject to the limitation on deduction heretofore mentioned. Thus, such interest expense incurred or paid shall not be diminished by the percentage of interest income earned which had been subjected to final withholding tax.

c. Taxes – paid or incurred within the taxable year in connection with the taxpayer’s trade or business including Documentary Stamp Tax, Excise Tax, Local Business Tax, Import Duties, BIR Registration Fees, Community Tax. However, taxes are not deductible if pertains to the following:

 Philippine income tax

 Foreign income tax, if taxpayer avails of the foreign tax credit

 Estate and donor’s tax

 Taxes assessed against local benefits of a kind that tends to increase the value of the property assessed

 Surcharge and Penalties incident to delinquency

d. Losses i. Ordinary Losses – Incurred in trade or business and sustained by a taxpayer under normal business operations. Losses from destruction or disposal of inventory, machinery or equipment which have been declared as waste or obsolete due to spoilage, deterioration, obsolescence, no destruction or disposal of any inventory, machinery or equipment shall be made without the presence and supervision of an authorized BIR representative. The application for inventory or asset disposal/destruction shall be filed with and processed by the concerned BIR district office where the principal place of business of the taxpayer is registered upon complete submission of the prescribed supporting documents and information.

ii. Casualty Losses – Complete or partial destruction of property resulting from event of a sudden, unexpected, or unusual nature such as fire, storm, shipwreck or other casualties or from robbery, theft or embezzlement. The submission of sworn declaration of loss within 45 days after the date of the event stating the nature of the event that gave rise to the loss, description and location of the damaged property, cost of the property and amount of insurance received. Properties declared as casualty loss must have been properly reported as part of the taxpayer’s assets in the taxpayer’s accounting records and financial statements in the year immediately preceding the occurrence of the loss, with the costs of acquisition clearly established and recorded otherwise, the claim for deduction shall not be allowed.

iii. Net Operating Loss Carry Over (NOLCO) – the excess of allowable deduction over gross income of the business in a taxable year. The NOLCO of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next 3 consecutive taxable years immediately following the year of such loss. Provided, however, that any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction.

NOLCO shall be allowed as deduction in computing the taxpayer’s income taxes per quarter and annual final adjustment income tax returns. In order that compliance with this three-year statutory requisite may be effectively monitored, the taxpayer shall, at all times, show its NOLCO deduction, in its income tax return, as a separate item of deduction. In no case may NOLCO be claimed, as a part of the taxpayer’s other itemized deductions, like under deduction of “losses,” in general. Corporations allowed to claim NOLCO deductions effectively cannot enjoy the benefit of NOLCO for as long as it is subject to MCIT in any taxable year.

In this case, the running of the three-year period for the expiry of NOLCO is not interrupted by the fact that such corporation is subject to MCIT in any taxable year during such three-year period. Reportorial Requirement

• The NOLCO shall be separately shown in the taxpayer’s income tax return (also shown in the Reconciliation Section of the Tax Return).

• The Unused NOLCO shall be presented in the Notes to the Financial Statements showing, in detail:

 the taxable year in which the net operating loss was sustained or incurred, and

 any amount thereof claimed as NOLCO. NOLCO for taxable years 2020 to 2021 may be carried over as a deduction from gross income for the next five (5) consecutive years following the year of such loss. (RR 25-2020) iv. Capital Losses and securities becoming worthless v. Special losses vi. Losses from wash sales of stock or securities vii. Wagering losses viii. Abandonment losses e. Bad Debts – debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year. Requisite for deductibility:

1. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable;

2. The same must not be sustained in a transaction entered into between related parties enumerated under Section 36(B) of the Tax Code;

3. The same must be connected with the taxpayer’s trade, business or practice of profession;

4. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year;

5. The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year, EXCEPT FOR BANKS where the Bangko Sentral ng Pilipinas (BSP) shall ascertain the worthlessness and uncollectibility of the bad debts and shall approve the writing-off of said debts. Before a taxpayer may charge off and deduct a debt, he must ascertain and be able to demonstrate with reasonable degree of certainty the uncollectibility of the debt. The Commissioner of Internal Revenue will consider all pertinent evidence, including:

• The value of the collateral, if any, securing the debt and the financial condition of the debtor in determining whether the debt is worthless, or;

• The assigning of the case of collection to an independent collection lawyer who is not under the employ of the taxpayer and who shall report on the legal obstacle and the virtual impossibility of collecting the same from the debtor and who shall issue a statement under oath showing the propriety of the deductions thereon made for alleged debts. •

Thus, where the surrounding circumstances indicate that a debt is worthless and uncollectible and that legal action to enforce payment would in all probability not result in the satisfaction of execution on a judgment, a showing of these facts will be sufficient evidence of the worthlessness of the debt for the purpose of deduction. f. Depreciation – a reasonable allowance for the exhaustion, wear and tear, and obsolescence of property used in the trade or business. Requisite for deductibility: 1. must be reasonable; 2. must be for property used or employed in the business, or temporarily not in use; 3. must be charged off during the taxable year

• Methods of computing in general

 Straight-line method

 Declining-balance method

 Sum-of-the-years digit method

 Any other method which may be prescribed by the Secretary of Finance upon recommendation of the BIR

g. Depletion of Oil and Gas Wells and Mines – In case of oil and gas wells or mines, capital invested may be amortized using cost- depletion method, provided: 1. When allowance for depletion shall equal capital invested, no further allowance shall be granted; 2. After production in commercial quantities has commenced, intangible exploration and development drilling costs shall be treated as follows:

 Incurred for non-producing wells and/or mines – Deductible in the year incurred

 Incurred for producing wells and/or mines:

o Option 1 – Deductible in full in the year paid or incurred; or

o Option 2 – Capitalized and amortized • In the case of non-resident aliens engaged in trade or business or resident foreign corporations, depletion shall be allowed only if the oil and gas wells or mines are located in the Philippines.

h. Charitable and Other Contributions i. When deductibility is limited • Donations to accredited non-stock, non-profit corporations shall be allowed LIMITED deductibility as follows:

 For individual donor – not in excess of 10% of the donor’s income derived from trade, business or profession computed before the donation; and

 For corporate donor – not in excess of 5% of the donor’s income derived from trade, business or profession computed before the donation; ii. When fully deductible • Donations to the following shall be allowed FULL deductibility:

 Donations to the Philippine Government or to any of its agencies or political subdivisions, including fully-owned government corporations undertaking priority activities;

 Donations to foreign institutions or international organizations;

 Donations to accredited NGOs subject to conditions set forth in RR No. 13-98 iii. Requisites for Deductibility – Evidence or proof submitted to the BIR by showing the Certificate/s of Donation and indicating therein the following:

 Actual receipt by the accredited non-stock, non-profit corporation/NGO of the donation or contribution and the date of receipt thereof; and

 The amount of the charitable donation or contribution, if in cash; if property, whether real or personal, the acquisition cost of the said property. i. Research and Development i. When Allowed as a Deduction

 if incurred in connection with the trade, business or profession of the taxpayer; and

 if not charged to capital account ii. Treatment of R&D as Deferred Expense – At the option of the taxpayer, R&D may be deferred and amortized over a period not less than 60 months if:

i. if paid or incurred in connection with trade, business or profession;

ii. if not treated as expense; and

iii. if chargeable to capital account not subject to depreciation

j. Pensions – contribution made to a pension trust may be claimed as deduction in the following manner: i. Amount contributed for the normal service cost – 100% deductible; and ii. Amount contributed for the past service cost – 1/10 of the amount contributed is deductible in year the contribution is made, the remaining balance will be amortized equally over nine consecutive years. • Requisites for deductibility of payments to pension trusts

1. There must be a pension or retirement plan to provide for the payment of reasonable pensions to employees;

2. The pension plan is reasonable and actuarially sound;

3. It must be funded by the employer;

4. The amount contributed must no longer be subject to the employer’s control or disposition; and

5. The payment has not theretofore been allowed as a deduction. • Actuarial Valuation for Funding vs. for PAS 19 – The actuarial valuation for PAS 19 purposes has the following features: 1. Uses a prescribed non-entity-specific rate of discounting liabilities 2. May defer recognition of some components (gains/losses, PSC) 3. Must allocate cost to periods when service is rendered as described by plan formula. Under Section 118 of RR No. 2, contributions to the pension plan may only be claimed as deductions provided the following requirements are satisfied: a. There must be a pension or retirement plan to provide for the payment of reasonable pensions to employees; b. The pension plan is reasonable and actuarially sound; c. It must be funded by the employer; d. The amount contributed must no longer be subject to the employer’s control or disposition; and e. The payment has not theretofore been allowed as a deduction. Thus, actual funding is required for the retirement expense to be deductible. However, since the deductibility of the actual contribution to the retirement fund will be based on the normal cost and past service cost in the actuarial valuation for funding, the computation of the retirement expense to be claimed as deduction for Income Tax needs to be supported by said actuarial valuation. Substantiation Requirements o Substantiation Requirements. – No deduction from gross income shall be allowed unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer.

Taxation of individuals: compliance

Filing and payment: A. BIR Form 1700 Deadline: On or before 15th Day of April Taxpayer: Annual Income Tax For Individuals Earning Purely Compensation Income (Including Non-Business/Non-Profession Related Income) B. BIR Form 1701 Deadline: On or before 15th Day of April Taxpayer: Annual Income Tax Return Individuals, Estates and Trusts C. BIR Form 1701 AIF Deadline: On or before 15th Day of April Taxpayer: Account Information Form for Self-Employed Individuals, Estates and Trusts (Including those with Mixed Income, i.e., Compensation Income and Income from Business and/or Practice of Profession) and Estates and Trusts (Engaged in Trade or Business) D. BIR Form 1701Q Deadline: 1st Quarter – May 15; 2nd Quarter – August 15; 3rd Quarter – November 15 Taxpayer: Quarterly Income Tax Return For Individuals, Estates and Trusts

Withholding taxes

A. EXPANDED WITHHOLDING TAX

Type of Income Payment	Tax Rate
1. Professional and talent fees paid to individuals	5% if gross income for the current year did not exceed P3M;
	10% if gross income is more than P3M
2. Professional and talent fees paid to non-individuals	10% if gross for the current year did not exceed P720,000;
	15% if gross income exceeds P720,000
3. Rentals of real properties	5%
	(Rental payments for the use or possession without taking title of real properties used in business)
4. Rentals of personal properties	5%
	(Personal properties in excess of P10,000 annually, except those under finance lease (R.A 8556)
5. Rentals of poles, satellites, transmission facilities	5%
6. Rentals for Billboards	5%
7. Cinematographic film rentals and other payments	5%
8. Income payments to certain contractors	2%
	(This applies to payments to certain contractors in Philippines such as to general engineering constructions, general building constructions, specialty contractors, and other contractors specifically enumerated in RR 11-2018 amending RR 2-98 under TRAIN or RA 10963 in Philippines.)
9. Income distribution to the beneficiaries	15%
	(This applies to distribution of income earned by  estates of deceased person through their authorize representative to their legal heirs or beneficiaries prior to or during the distribution of such estates either extra judicial or through the judicial system.)
10. Income payments to partners of general professional partnerships	15% if the gross income for the current year exceeds P720,000;
	(10%) if otherwise.
11. Where the seller/transferor is exempt from the creditable withholding tax in accordance with Sec. 2.57.5 of these regulations	EXEMPT
		Upon the following values of real property, where the seller/transferor is habitually engaged in the real estate business	1.5% if the selling price is five hundred thousand pesos (P500,000.00) or less;
3% if the selling price is more than five hundred thousand pesos (P500,000.00) but not more than two million pesos (P2,000,000.00);
5% if the selling price is more than two million pesos (P2,000,000.00)
Where the seller/transferor is not habitually engaged in the real estate business	6%
		12. Income payments of importers to government personnel	15%
(This applies to additional payment of importers, shipping and airline companies or their agents to government personnel for overtime services authorize by law)
13. Income payments of credit card companies to establishments	50% of 1% of gross payments
14. Income payment made by top withholding agents, either private corporations or individuals, to their local/resident supplier of goods and local/resident supplier of services other than those covered by other rates of withholding tax	1% -supplier of goods;
	2%-supplier of services
15. Income Payments made by a government office, national or local, including barangays, or their attached agencies or bodies, and government-owned or controlled corporations to its local/resident supplier of goods/services, other than those covered by other rates of withholding tax	1% -supplier of goods;
	2%-supplier of services
16. Tolling fees paid to refineries	5%
17. Payments made by pre-need companies to funeral parlor	1%
18. Payments made to embalmers	1%
19. Income payments made to suppliers of agricultural products	1%
20. Income payments on purchases of minerals, mineral products and quarry resources as defined and discussed in Section 151 of the Tax Code	5% or 1% for BSP
	(This applies to purchase of minerals, mineral products, and quarry resources such as but not limited to silver, gold, marble, granite, gravel, sand, boulders and other materials/products, except for BSP payments)
21. MERALCO refund/interest payments	15% on refunds;
	10% / 15% interest on meter deposit
	(This is in relation to MERALCO refunds under Supreme Court case G.R No. 141314 of April 9, 2003- 15% on gross amount of refund[1], and on interest income on meter deposit- 10% for residential and general service customers, 15% for non-resident service customers. [RR 1-2019])
22. Withholding Tax on Refund by other electric distribution utilities	10% / 15%
	(This is in reference to ERC Resolution No. 8, Series of 2008, dated June 4, 2008, in relation to the mandates of Article 8 of the Magna Carta  for Residential Electricity Consumers and Article 3.4.2 of DSOAR, exemption all electricity consumers from payment of meter deposits. On interest income on meter deposit- 10% for residential and general service customers, 15% for non-resident service customers. [RR 1-2019])
23. Withholding Tax on political distributions	5%
	(This refers to income payments made by political parties or candidates on campaign expenditures, and juridical or individual persons on purchase of goods and services as campaign contributions to political parties and candidates)
24. Interest income other than from deposit substitutes	15%
	(This refers to payments for interest income derived from any other debt instruments not within the coverage of ‘deposit substitutes’ and Revenue Regulations 14-2012, unless otherwise provided by law or regulations. [RR 1-2019])
25. Income payments to Real Estate Investment Trust	1%
26. Income payments on sugar	1%
[1] Based on RR No. 15-2022, effective December 3, 2022, 15% EWT shall be withheld from gross amount of refunds to non-residential customers only.

B. FINAL WITHHOLDING TAX

Type of Income Payment	Tax Rate
Income Payment to a Domestic Corporation
1. Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements derived from sources within the Philippines	20%
2. Royalties derived from sources within the Philippines	20%
3. Interest income derived from a depository bank under the Expanded Foreign Currency Deposit system	15%
4. Income derived by a depository bank under the Expanded Foreign Currency Deposit System from foreign transactions with local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with Foreign Currency Deposit System Units and other depository banks under the expanded foreign currency deposit system including interest income from foreign currency loans granted by such depository bank under the said expanded foreign currency deposit system to residents	10%
5. On capital gains presumed to have been realized from the sale, exchange or other disposition of real property located in the Philippines classified as capital assets, including pacto de retro sales and other forms of conditional sales based on the gross selling price or fair market value as determined in accordance with Sec. 6(E) of the Code, whichever is higher	6%
6. Gross income derived from contracts by subcontractors from service contractors engaged in ‘petroleum operations’ as defined under P.D. 87 (also known as the ‘Oil Exploration and Development Act’) in the Philippines	8%
7. Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. — On net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation	15%
Income Payment to a Resident Foreign Corporation
1. Tax on Branch Remittances — On any profit remitted by the Philippine branch of a foreign corporation to its head office abroad based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof except those registered with the Philippine Economic Zone Authority (PEZA)	15%
2. Interest on any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines.	20%
3. Interest income derived from a Depository Bank under the Expanded Foreign Currency Deposit System	15%
4. Interest income derived from a Depository Bank under the Expanded Foreign Currency Deposit system	7.50%
5. Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas to transact business with foreign currency deposit system units and other depository banks under the expanded foreign currency deposit system including interest income from foreign currency loans granted by such depository banks under the said expanded foreign currency deposit system to resident	10%
6. Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. — On the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation	15%
7. Gross income derived from contracts by subcontractors from service contractors engaged in ‘petroleum operations’ as defined under P.D. 87 (also known as the ‘Oil Exploration and Development Act’) in the Philippines	8%
Income Derived From all Sources Within the Philippines by Non-Resident Foreign Corporation
1. In general — on gross income derived from all sources within the Philippines such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments, or other fixed or determinable annual, periodic or casual gains, profits and income and capital gains (except capital gains realized from sale, exchange, disposition of shares of stock in any domestic corporation which is subject to capital gains tax under item 7 hereof)	25%
2. Gross income from all sources within the Philippines derived by non-resident cinematographic film owners, lessors or distributors	25%
3. On the gross rentals, lease and charter fees, derived by non-resident owner or lessor of vessels from leases or charters to Filipino citizens or corporations as approved by the Maritime Industry Authority	4.50%
4. On the gross rentals, charter and other fees derived by non-resident lessor of aircraft, machineries and other equipment	7.50%
5. Interest on foreign loans	20%
6. Dividends received from a domestic corporation — In general, it is subject to Twenty-five percent (25%) final withholding tax. However, a reduced rate of Fifteen percent (15%) shall be applied, subject to the condition that the country in which the non-resident foreign corporation is domiciled (a) shall allow a credit against the tax due from the said non-resident foreign corporation which are equivalent to taxes deemed to have been paid in the Philippines equal to ten percent (10%) effective January 1, 2021, which represents the difference between the regular income tax rate for non-resident foreign corporation under Section 28(B)(1) of the NIRC of 1997, as amended, and the fifteen percent (15%) tax on dividends as herein provided; or, (b) does not impose any income tax on dividends received from a domestic corporation.	15%
		7. Capital Gains from sale of Shares of Stock Not Traded in the Stock Exchange. — On net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation	15%

C. WITHHOLDING TAX ON COMPENSATION

• Effective January 1, 2018 until December 31, 2022: 

Range of Taxable Income			TAX DUE = a + (b x c)
Over	Not Over	Basic Amount (a)	Additional Rate (b)	Of Excess Rate (c)
–	₱250,000	–		–
250,000	400,000	–	20%	₱250,000
400,000	800,000	30,000	25%	400,000
800,000	2,000,000	130,000	30%	800,000
2,000,000	8,000,000	490,000	32%	2,000,000
8,000,000	–	2,410,000	35%	8,000,000

• Effective beginning January 1, 2023:

Range of Taxable Income			TAX DUE = a + (b x c)
Over	Not Over	Basic Amount (a)	Additional Rate (b)	Of Excess Rate (c)
–	₱250,000	–		–
250,000	400,000	–	15%	₱250,000
400,000	800,000	22,500	20%	400,000
800,000	2,000,000	102,500	25%	800,000
2,000,000	8,000,000	402,500	30%	2,000,000
8,000,000	–	2,202,500	35%	8,000,000

D. FRINGE BENEFITS GRANTED TO EMPLOYEES (EXCEPT RANK-AND-FILE EMPLOYEES)

Classification of Employee	Tax Rate
Employee is a citizen/resident alien/non-resident alien engaged in trade or business within the Philippines	35%
Employee is a non-resident alien not engaged in trade or business within the Philippines	25%

The actual monetary value of the fringe benefit shall be divided by sixty (65%) to get the grossed-up value subject to 35% fringe benefit tax (FBT); while the divisor shall be seventy five percent (75%) to get the grossed-up value subject to 25% FBT.

E. WITHHOLDING TAX ON GOVERNMENT MONEY PAYMENTS (GMP)WITHHOLDING TAX ON GOVERNMENT MONEY PAYMENTS (GMP)

This is the tax withheld by National Government Agencies (NGAs) and instrumentalities, including government-owned and controlled corporations (GOCCs) and local government units (LGUs), before making any payments to VAT registered taxpayers/suppliers/payees on account of their purchases of goods and services.

                                                        Nature of Payment and its Tax Rates

TAX TYPE	DESCRIPTION	RATE	ATC
Applicable to Government Withholding Agent Only
WV	VAT withholding on Purchase of Goods	5%	WV010
WV	VAT Withholding on Purchase of Services	5%	WV020
Applicable to Both Government and Private Withholding Agents
WV	VAT Withholding from non-residents (Government Withholding Agents)	12%	WV040
WV	VAT Withholding from non-residents (Private Withholding Agents)	12%	WV050
WV	VAT Withholding on Other Services from non-residents (Government Withholding Agents)	12%	WV060
WV	VAT Withholding on Other Services from non-residents (Private Withholding Agents)	12%	WV070
WV	VAT Withholding on Purchases of Goods (with waiver of privilege to claim tax credit) creditable	12%	WV012
WV	VAT Withholding on Purchases of Goods (with waiver of privilege to claim input tax credit) final	12%	WV014
WV	VAT Withholding on Purchases of Services (with waiver of privilege to claim input tax credit) creditable	12%	WV022
WV	VAT Withholding on Purchases of Services (with waiver of privilege to claim input tax credit) final	12%	WV024

F. FINAL WITHHOLDING TAX

This is a kind of withholding tax which is prescribed on certain income payments and is not creditable against the income tax due of the payee on other income subject to regular rates of tax for the taxable year. Income Tax withheld constitutes the full and final payment of the Income Tax due from the payee on the particular income subjected to final withholding tax.

The amount of income tax withheld by the withholding agent is constituted as a full and final payment of income tax due from the payee of the said income.

The liability for payment of tax rests primarily on the payor as a withholding agent. Failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from payor/withholding agent.

The payee is not required to file an income tax return for the particular income.

                                                              Nature of Payment and its Tax Rates

TAX   TYPE	DESCRIPTION	TAX RATE	ATC
			IND	CORP
WF	Interest on Foreign loans payable to Non-Resident Foreign Corporation (NRFCs)	20%		WC180
WF	Interest and other income payments on foreign currency transactions/loans payable of Offshore Banking Units (OBUs)	10%		WC190
WF	Interest and other income payments on foreign currency transactions/loans payable of Foreign Currency Deposits Units (FCDUs)	10%		WC191
WF	Cash dividend payment by domestic corporation to citizens and residents aliens/NRFCs	10%	W1202
		25%		WC212
WF	Property dividend payment by domestic corporation to citizens and resident aliens/NRFCs	10%	WI203
		25%		WC213
WF	Cash dividend payment by domestic corporation to NFRCs whose countries allowed tax deemed paid credit (subject to tax sparing rule)	15%		WC222
	Property dividend payment by domestic corporation to NFRCs whose countries allowed tax deemed paid credit (subject to tax sparing rule)	15%		WC223
WF	Cash dividend payment by domestic corporation to non-resident alien engaged in Trade or Business within the Philippines (NRAETB)	20%	WI224
WF	Property dividend payment by domestic corporation to NRAETB	20%	WI225
WF	Share of NRAETB in the distributable net income after tax of a partnership (except GPPs) of which he is a partner, or share in the net income after tax of an association, joint account or a joint venture taxable as a corporation of which he is a member or a co-venturer	20%	WI226
WF	On other payments to NRFCs	25%		WC230
WF	Distributive share of individual partners in a taxable partnership, association, joint account or joint venture or consortium	10%	WI240
WF	All kinds of royalty payments to citizens, resident aliens and NRAETB (other than WI380 and WI341), domestic and resident foreign corporations	20%	WI250	WC250
WF	On prizes exceeding ₱ 10,000.00 and other winnings paid to individuals	20%	WI260
WF	Branch profit remittance by all corporations except PEZA/SBMA/CDA registered	15%		WC280
WF	On the gross rentals, lease and charter fees derived by non-resident owner or lessor of foreign vessels	4.50%		WC290
WF	On gross rentals, charter and other fees derived by non-resident lessor or aircraft, machineries and equipment	7.50%		WC300
WF	On payments to oil exploration service contractors/sub-contractors	8%	WI310	WC310
WF	Payments to non-resident alien not engage in trade or business within the Philippines (NRANETB) except on sale of shares in domestic corporation and real property	25%	WI330
WF	On payments to non-resident individual/foreign corporate cinematographic film owners, lessors or distributors	25%	WI340	WC340
WF	Royalties paid to NRAETB on cinematographic films and similar works	25%	WI341
WF	Final tax on interest or other payments upon tax-free covenant bonds, mortgages, deeds of trust or other obligations under Sec. 57C of the NIRC of 1997, as amended	30%	WI350
WF	Royalties paid to citizens, resident aliens and nraetb on books, other literary works and musical compositions	10%	WI380
WF	Informers cash reward to individuals/juridical persons	10%	WI410	WC410
WF	Cash on property dividend paid by a Real Estate Investment Trust	10%	W700	WC700

 

Value-added tax/Goods and services tax

Type of tax: A. Value-Added Tax (VAT) VAT is a form of sales tax. It is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines. It is an indirect tax, which may be shifted or passed on to the buyer, transferee or lessee of goods, properties, or services.

1. General

VAT is a tax on consumption. Although the seller is the person primarily and legally liable to pay the tax, the seller by adding the tax to the selling price, shifts the burden of the VAT to the intermediate buyers and ultimately to the final purchaser. Under the VAT system, a transaction may either be subject to or exempt from VAT. If a sale is subject to VAT (either at 12% or 0% rate), the seller is generally entitled to deduct from its VAT (output tax) liability the input tax credit arising from its VATable importations and/or local purchases from its VAT-registered suppliers (please refer to Item No. 6 of this Tax Guide for a detailed discussion on input tax credits). On the other hand, if a sale is exempt, then the seller does not pay any VAT (output tax) on the sale. Neither is the seller allowed to claim as input tax credits the VAT paid on its importations/local purchases relating to the VAT-exempt sale of goods and services. In case of input taxes on importations/local purchases relating to both the VAT exempt and the VAT taxable activities, the seller must allocate the related input taxes between the two activities because it may only claim the input taxes allocable to the taxable activity.

2. Tax Rate • Subject to 12% VAT • Subject to 0% VAT • Exempt from VAT

3. VATable Transactions

3.1 In General VAT is imposed on a person who, in the course of trade or business, sells, barters, exchanges or leases goods or properties, or renders services and on a person who imports goods. “In the course of trade or business” means the regular conduct or pursuit of a commercial or economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization, or government entity. (Section 4.105-3 of RR No. 16-05, as amended) “Goods and properties” refers to all tangible and intangible objects, which are capable of pecuniary estimation (Section 4.106-2 of RR No. 16-05, as amended). “Sale or exchange of services” means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by technical consultants. (Section 4.108-2 of RR No. 16-05, as amended)

3.2 Gross Selling Price (in case of sale of goods) In Section 106 (A) of RA 10963, as amended, it is stated that the 12% VAT shall be based on the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged. The term “gross selling price” means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding the VAT. The excise tax, if any, on such goods or properties shall form part of the gross selling price.

3.3 Gross Receipts (in case of sale of services) Moreover, Section 108 (A) of RA 10963, as amended, provides that the 12% VAT shall be based on the gross receipts derived from the sale or exchange of services, including the use or lease of properties. The term “gross receipts” means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits applied as payments for services rendered and advance payments actually or constructively received during the taxable period for the services performed or to be performed for another person, excluding the VAT, except those amounts earmarked for payment to unrelated third (3rd) party or received as reimbursement for advance payment on behalf of another which do not redound to the benefit of the payor.

A payment is a payment to a third (3rd) party if the same is made to settle an obligation of another person, e.g., customer or client, to the said third party, which obligation is evidenced by the sales invoice/official receipt issued by said third party to the obligor/debtor (e.g., customer or client of the payor of the obligation).

An advance payment is an advance payment on behalf of another if the same is paid to a third (3rd) party for a present or future obligation of said another party which obligation is evidenced by a sales invoice/official receipt issued by the obligee/creditor to the obligor/debtor (i.e., the aforementioned “another party”) for the sale of goods or services by the former to the latter.

For this purpose, ‘unrelated party’ shall not include taxpayer’s employees, partners, affiliates (parent, subsidiary and other related companies), relatives by consanguinity or affinity within the fourth (4th) civil degree, and trust fund where the taxpayer is the trustor, trustee or beneficiary, even if covered by an agreement to the contrary.

“Constructive receipt” occurs when the money consideration or its equivalent is placed at the control of the person who rendered the service without restrictions by the payor. The following are examples of constructive receipts:

a) deposits in banks which are made available to the seller of services without restrictions;

b) issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payment for services rendered; and

c) transfer of the amounts retained by the payor to the account of the contractor.

Allowable Deductions from Gross Selling Price or Gross Receipts

Section 106 (D) of the Tax Code provides that the value of goods or properties sold and subsequently returned or for which allowances were granted by a VAT-registered person may be deducted from the gross sales or receipts for the quarter in which a refund is made or a credit memorandum or refund is issued. Sales discount granted and indicated in the invoice at the time of sale and the grant of which does not depend upon the happening of a future event may be excluded from the gross sales within the same quarter it was given.

Moreover, Section 4.106-9 of RR No. 16-05 provides that in computing the taxable base during the month or quarter, the following shall be allowed as deductions from gross selling price:

a) Discounts determined and granted at the time of sale, which are expressly indicated in the invoice, the amount thereof forming part of the gross sales duly recorded in the books of accounts.

Sales discount indicated in the invoice at the time of sale, the grant of which is not dependent upon the happening of a future event, may be excluded from the gross sales within the same month/quarter it was given.

b) Sales returns and allowances for which a proper credit or refund was made during the month or quarter to the buyer for sales previously recorded as taxable sales. I

n BIR Ruling No. 111-80 dated July 28, 1980, the BIR, in clarifying the treatment of sales discount for sales tax (now VAT) purposes, cited BIR Ruling No. 66-0010 which ruled that:

“Sales discounts are deductible from the gross selling price of a manufacturer for purposes of sales tax, provided that they are determinable and definitely agreed upon at the time of sale and not in the nature of rebates or partial remissions of indebtedness. (BIR Ruling No. 105-02, Sept. 4, 1952; BIR Quarterly Bulletin, Vol. 1, No. 2). If the discounts are determined and given after the consummation of the sales, they are not deductible from the gross selling price of the manufacturer in computing his monthly sales tax. (BIR Ruling 105-02, May 27, 1954; BIR Quarterly Bulletin, Vol. III, No. 2)”

The BIR opined that only bonafide discounts which are given to purchasers as a consideration in the sales contract and which are ascertainable and definitely agreed upon by the vendor and the vendee at the time of sale deductible from the gross selling price for purposes of the sales tax. Such discounts must be expressly indicated in the invoice. Thus, credit given to customers by way of credit memo or note to cover prompt payment discount, volume discount and/or other special or confidential discounts which although granted to the vendee at the time of sale but are not expressly indicated in the sales invoice are not deductible from gross sales in determining the sales tax due on the finished products. Likewise, credits for allowances to cover rollback in prices and other price adjustments are not deductible for sales tax purposes.

Moreover, the BIR, in BIR Ruling (UN-176-A-94) dated June 8,1994 provides to wit:

“Ordinarily, discounts and rebates when properly determined and given are deductible from gross income. Rebates and discounts are legitimately given when made at the time of sale and in accordance with a pre-arranged agreement between the seller and the customer. The discounts or rebates are represented by a fixed percentage of deductible cost which shall appear on the face of the contract, document or invoice (See Valparaiso Grain and Lumber Co., 44 BTA 125; Messenger Publishing Co., 2 BTA 30; and Central Consumers Wine and Liquor; CL BTA 1190)”

Thus, the output tax on sale of goods and services in the course of the Company’s trade or business during the quarter shall be determined by applying the rate of 12% on the gross sales or gross receipts, respectively, exclusive of VAT and net of the allowable deductions, made during the quarter.

3.4 Incidental Sale of Goods or Services

Under Section 105 of the Tax Code, any person who in the course of business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to VAT. The phrase “in the ordinary course of business” means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. The term “incidental” means something necessary, appertaining to, or depending upon another which is termed the principal, something incident to the main purpose. [The Robin Goodfellow, D.C. Wash., 20 F.2d 9924, 925; cited in Words & Phrases, Vol. 20, p. 419 (1940); Magsaysay Lines, Inc., et.al. vs. Commissioner of Internal Revenue (CTA Case No. 4353 dated April 27, 1992)].

In addition, in VAT Ruling No. 568-88 dated December 14, 1998, the BIR ruled that a corporation’s transactions incident to its normal activity of leasing personal property including sale of its own assets that are movable, tangible objects, which are appropriable or transferable are subject to 10% VAT (now 12%).

Based on the foregoing, the Company’s sale of goods and services incidental to its regular conduct or pursuit of trade or business may be subject to 12% VAT. 3.5 Transactions “Deemed Sale”

Transactions “deemed sale” are also subject to VAT. Under Section 4.106-7 of RR No. 16-05, as amended by Section 7 of RR No. 04-07, the following are examples of “deemed sale” transactions:

i. Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business. Transfer of goods or properties not in the course of business can take place when VAT-registered person withdraws goods from his business for his personal use;

ii. Distribution or transfer to: a. Shareholders or investors share in the profits of VAT-registered person such as distribution of property dividends; b. Creditors in payment of debt or obligation.

iii. Consignment of goods if actual sale is not made within 60 days following the date such goods were consigned. Consigned goods returned by the consignee within the 60-day period are not deemed sold;

iv. Retirement from or cessation of business with respect to all goods on hand, whether capital goods, stock-in-trade, supplies or materials as of the date of such retirement or cessation, whether or not the business is continued by the new owner or successor. The following circumstances shall, among others, give rise to transactions “deemed sale”:

a. Change of ownership of the business; and

b. Dissolution of a partnership other than a general professional partnership and the creation of a new partnership which takes over the business.

Based on Section 4.106-7 of RR No. 16-05, as amended by Section 7 of RR No. 04-07, the Commissioner shall, by regulations, determine the appropriate tax base in cases where the gross selling price on deemed sale transactions is unreasonably lower than the actual market value.

3.6 Transactions that are now subject to 12% VAT

Under Section 2 of RR 9-2021, provides that the following are now subject to 12% VAT as follows:

A. Those transactions considered as export sale under subparagraphs (3), (4), and (5) of Section 106 (A) (2) of the Tax Code of 1997, as amended, to wit:

1. Sale of raw materials or packaging materials to a non-resident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer’s goods and paid for in acceptable foreign currency, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP) [Sec. 106 (A) (2) (a) (3)];

2. Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production [Sec. 106 (A) (2) (a) (4)]; and

3. Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, and other special laws [Sec. 106 (A) (2) (a) (5)].

B. The sale of sale of services and use or lease of properties under subparagraphs (1) and (5) of Section 108 (B) of the Tax Code of 1997, as amended:

1. Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP) [Sec. 108 (B) (1)]; and

2. Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of the total annual production [Sec. 108 (B) (5)].

4. Transactions subject to Zero-Rated VAT

Sections 4.106-5 and 4.108-5 of RR No. 16-2005 as further amended by RR No. 13- 2018, RR No. 26-2018, and RR No. 9-2021.

a. Zero-Rated Sales of Goods or Properties The following sales by VAT-registered persons shall be subject to zero-percent (0%) rate:

a. Export sales — “Export Sales” shall mean:

(1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported, paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

(2) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations: Provided, That the goods, supplies, equipment, and fuel shall be used exclusively for international shipping or air transport operations.

The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations is limited to goods, supplies, equipment and fuel that shall be used in the transport of goods and passengers from a port in the Philippines directly to a foreign port, or vice versa, without docking or stopping at any other port in the Philippines unless the docking or stopping at any other Philippine port is for the purpose of unloading passengers and/or cargoes that originated from abroad, or to load passengers and/or cargoes bound for abroad: Provided, further, that if any portion of such fuel, goods, supplies or equipment is used for purposes other than that mentioned in this paragraph, such portion of fuel, goods, supplies, and equipment shall be subject to 12% VAT.

b. Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate.

b. Zero-Rated Sales of Services

(b) Transactions Subject to Zero Percent (0%) VAT Rate. — The following services performed in the Philippines by a VAT-registered person shall be subject to zero percent (0%) VAT rate:

(1) Services other than processing, manufacturing or repacking rendered to a person engaged in business conducted outside the Philippines or to a non-resident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP;

(2) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate;

(3) Services rendered to persons engaged in international shipping or air transport operations, including leases of property for use thereof: Provided, that these services shall be exclusively for international shipping or air transport operations. Thus, the services referred to herein shall not pertain to those made to common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines, the same being subject to twelve percent (12%) VAT under Sec. 108 of the Tax Code.

(4) Transport of passengers and cargo by domestic air or sea vessels from the Philippines to a foreign country. Gross receipts of international air or shipping carriers doing business in the Philippines derived from transport of passengers and cargo from the Philippines to another country shall be exempt from VAT; however, they are still liable to a percentage tax of three percent (3%) based on their gross receipts derived from transport of cargo from the Philippines to another country as provided for in Sec. 118 of the Tax Code; and

(5) Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal and steam, ocean energy, and other emerging sources using technologies such as fuel cells and hydrogen fuels: Provided, however, that zero-rating shall apply strictly to the sale of power or fuel generated through renewable sources of energy, and shall not extend to the sale of services related to the maintenance or operation of plants generating said power.

5. Transactions exempt from VAT

Pursuant to Section 109 of the Tax Code, the following activities, which may apply to the Company, are exempt from VAT:

a. Sale or importation of agricultural, livestock, poultry, and marine food products in their “original state”, Provided, that the food is generally used for human consumption. Livestock or poultry does not include fighting cocks, racehorses, zoo animals and other animals generally considered as pets. Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt and copra shall be considered as agricultural products in their original state. Bagasse is not included in the exemption provided for under this section.

b. Sale or importation of fertilizers, seeds, seedlings and fingerlings, fish, prawn, livestock and poultry feeds, including ingredients, used in the manufacture of finished feeds except specialty feeds. Specialty feeds refers to food for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets.

c. Importation of personal and household effects belonging to residents of the Philippines returning from abroad and non-resident citizens coming to resettle in the Philippines.

d. Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects except machinery and other goods use in the manufacture and merchandise of any kind in commercial quantity belonging to persons coming to settle in the Philippines.

e. Services subject to Percentage Tax under Title V of the Tax Code.

f. Services by agricultural contract growers and milling for others of palay into corn rice, corn.

g. Medical, Dental, Hospital and Veterinary Services except those rendered by professional.

h. Educational services rendered by private educational institutions, duly accredited by the Department of Education (DepEd), the Commissions on Higher Education (CHED) the Technical Education and Skills Development Authority (TESDA) and those rendered by the government educational institutions.

i. Services rendered by individuals pursuant to an employer-employee relationship.

j. Services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines.

k. Transactions which exempt under international agreements to which the Philippines is a signatory under special laws, Except those under Presidential Decree No. 529 that grant Petroleum Exploration Concessionaires exemption from Custom Duty and Tax of Importation Machinery required for their Exploration Operation.

l. Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce.

Sale by agricultural cooperatives to non-members can only be exempted from VAT if the producer of the agricultural products sold is the cooperative itself. If the cooperative is not the producer (e.g. trader), only those sales to its members shall be exempted from VAT.

m. Gross Receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority;

n. Sales by non-agricultural, non-electric and non-credit cooperatives. Provided, that the share capital contribution of each member does not exceed Fifteen thousand pesos (P15,000) and regardless of the aggregate capital and net surplus ratably distributed among the members.

o. Export sales by person who are not VAT-registered;

p. Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business or sale residential lot valued at Two Million Five Hundred Thousand Pesos (P2,500,000) and below or sale of house and lot, and other residential dwellings valued at Four Million Two Hundred Thousand Pesos (P4,200,000) and below; Provided, further, that beginning January 1, 2024 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index, as published by the Philippine Statistics Authority (PSA);

q. Lease of residential unit with a monthly rental not exceeding Fifteen Thousand pesos (P15,000);

r. Sale, importation, printing or publication of books, and any newspaper, magazine, journal, review bulletin, or any such educational reading material covered by the UNESCO Agreement on the Importation of Educational, Scientific and Cultural Materials, including the digital or electronic format thereof: Provided, That the materials enumerated herein are not devoted principally to the publication of paid advertisements;

s. Transport of passengers by international carriers.

t. Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations; Provided, however, that the exemption from VAT on the importation and local purchase of passenger and/or cargo vessels shall be subject to the requirements on restriction on vessels importation and mandatory vessel retirement program of Maritime industry Authority (MARINA);

u. Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations. Provided, That the fuel, goods, and supplies shall be used for international shipping or air transport operations;

Thus, said fuel, goods and supplies shall be used exclusively or shall pertain to the transport of goods and/or passenger from a port in the Philippines directly to a foreign port, or vice versa, without docking or stopping at any other port in the Philippines unless the docking or stopping at any other Philippine port is for the purpose of unloading passengers and/or cargoes that originated from abroad, or to load passengers and/or cargoes bound for abroad.

Provided, further, that if any portion of such fuel, goods or supplies is used for purposes other than that mentioned in this paragraph, such portion of fuel, goods and supplies shall be subject to twelve percent (12%) VAT.

v. Services of bank, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries.

w. Sale or lease of goods and services, except sale of basic necessities and prime commodities, to senior citizens and persons with disability, as provided under Republic Act Nos. 9994 (Expanded Senior Citizens Act of 2010) and 10754 (An Act Expanding the Benefits and Privileges of Persons With Disability), respectively. Section 2 of RR No. 05-2017 which shall read as follows: 2.8 Basic Necessities — are goods vital to the needs of consumers for their sustenance and existence. For purposes of these Regulations, basic necessities shall include:

1. All kinds and variants of rice

2. Corn

3. All kind of bread (Pastries and cakes not included)

4. Fresh, dried and canned fish and other marine products (including frozen and in various modes of packaging)

5. Fresh pork, beef and poultry meat

6. All kinds of fresh eggs (excluding quail eggs)

7. Potable water in bottles and containers

8. Fresh and processed milk (excluding milk labelled as food supplement)

9. Fresh vegetables including root crops

10. Fresh fruits

11. Locally manufactured instant noodles

12. Coffee and coffee creamer

13. All kinds of sugar (excluding sweetener)

14. All kinds of cooking oil

15. Salt

16. Powdered, liquid, bar laundry and detergent soap

17. Firewood

18. Charcoal

19. All kinds of candles

20. Household liquefied petroleum gas, not more than 11 kgs. LPG content once every five (5) months bought from LPG dealers

21. Kerosene, not more than 2 liters per month.

2.9 Prime commodities — are goods not considered as basic necessities but are essential to consumers. For purposes of these Regulations, commodities shall include:

1. Flour

2. Dried, processed and canned pork, beef and poultry meat

3. Dairy products not falling under the definition of basic necessities

4. Onions and garlic

5. Vinegar, patis and soy sauce

6. Toilet/Bath soap

7. Fertilizer

8. Pesticides

9. Herbicides

10. Poultry feeds, livestock feeds and fishery feeds

11. Veterinary products

12. Paper, school supplies

13. Nipa shingle

14. Sawali

15. Cement, clinker, GI sheets

16. Hollowblocks

17. Plywood

18. Plyboard

19. Construction nails

20. Batteries (excluding cellphone and automotive batteries)

21. Electrical supplies and light bulbs

22. Steel wires

x. Transfer of property pursuant to Section 40(C)(2) of the NIRC, as amended;

y. Association Dues, Membership fees, and other assessments and charges collected by homeowners’ associations and condominium corporations.

z. Sale of gold to the Bangko Sentral ng Pilipinas (BSP)

aa. Sale of or importation of prescription drugs and medicines for:

(i) Diabetes, high cholesterol, and hypertension beginning January 1, 2020; and

(ii) Cancer, mental illness, tuberculosis, and kidney diseases beginning January 1, 2021. Provided, That the DOH shall issue a list of approved drugs and medicines for this purpose within sixty (60) days from the effectivity of this Act; and

bb. Sale or importation of the following beginning January 1,2021 to December 31, 2023:

i. Capital equipment, its spare parts and raw materials, necessary for the production of personal protective equipment components such as coveralls, gown, surgical cap, surgical mask, N-95 mask, scrub suits, goggles and face shield, double or surgical gloves, dedicated shoes, and shoe covers, for COVID-19 prevention; and

ii. All drugs, vaccines and medical devices specifically prescribed and directly used for the treatment of COVID-19; and

iii. Drugs for the treatment of COVID-19 approved by the Food and Drug Administration (FDA) for use in clinical trials, including raw materials directly necessary for the production of such drugs: Provided, That the Department of Trade and Industry (DTI) shall certify that such equipment, spare parts or raw materials for importation are not locally available or insufficient in quantity, or not in accordance with the quality or specification required: Provided, further, That for item (ii), within sixty (60) days from the effectivity of this Act, and every three (3) months thereafter, the Department of Health (DOH) shall issue a list of prescription drugs and medical devices covered by this provision: Provided, finally, That the exemption claimed under this subsection shall be subject to post audit by the Bureau of Internal Revenue or the Bureau of Customs as may be applicable.

cc. Sale or lease of goods properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of Three Million Pesos (P3,000,000).

6. Tax Credits

6.1 Substantiation of Input Tax Credits

Input tax means the value-added tax due from or paid by a VAT-registered person on importation of goods or local purchases of goods or services, including lease or use of property from another VAT-registered person in the course of trade or business.

It includes input taxes which can be directly attributed to transactions subject to the VAT plus a ratable portion of any input tax which cannot be directly attributed to either the taxable or exempt activity.

The Company, if duly registered as a VAT taxpayer, shall be entitled to creditable input taxes for all the VAT paid on its importation of goods and local purchases of goods and services. Input tax on importation should be supported by Import Entry and Revenue Declaration (IERD) and/or Single Administrative Document (SAD), Statement of Settlement of Duties and Taxes (SSDT) and the corresponding government official receipt showing actual payment of VAT on the imported goods (BIR Ruling No. 119-94 dated July 29, 1994, and RMC No. 30-2006). On the other hand, input taxes on domestic purchases of goods and services shall be allowed only if these are duly substantiated as follows (basically based on Section 110 of the Tax Code, as amended, and Sections 4.110-8 and 4.113-1 of RR No. 16-05):

a. The purchase is made in the course of the Company’s trade or business Input taxes attributable to advanced expenses (e.g., freight charges) in behalf of the affiliates, if any, may not be claimed by the Company against its output tax liability since they cannot be considered as paid or incurred in the course of the Company’s business pursuant to Section 110 of the Tax Code.

b. They must be supported by an invoice in case of purchase of goods or an official receipt (OR) in case of purchase of services containing the imprinted supplier’s tax identification number (TIN) with the word “VAT”. Enumerated below are the other requirements:

i. The invoices or official receipt must be issued in the name of the Company.

ii. The following information must be indicated in invoice or official receipt:

(1) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the VAT; the VAT shall be shown as a separate item in the invoice or receipt;

(2) In the case of sales in the amount of one thousand pesos (₱1,000) or more where the sale or transfer is made to a VAT-registered person, the name, business style, if any, address and TIN of the purchaser, customer or client, shall be indicated in addition to the information required in (b) (1) above.

iii. The invoice or official receipt must bear the BIR authority to print.

iv. Input tax paid on importations shall be allowed as credits if supported by duly supported by original / certified true copies of the Import Entry Declarations (IEDs)/ Import Entry Internal Revenue Declarations (IEIRDs), and/or Single Administrative Document (SAD), Statement of Settlement of Duties and Taxes (SSDT) and Bureau of Customs (BOC) ORs.

v. A cash register machine tape issued from a machine duly registered with the BIR, in lieu of the regular sales invoice, shall constitute valid proof of substantiation of tax credit only if it shows the information required under Sections 113 and 237 of the Tax Code, as amended. (Section 4.110-8 of RR No. 16-05)

vi. Input tax on purchases of real property should be supported by a copy of the public instrument i.e., deed of absolute sale, etc., together with the VAT receipt issued by the seller. (Section 4.110-8 of RR No. 16-05)

6.2 Credits for Input Tax

Under Section 4.110-1 of RR 16-05, “input tax” means the VAT due on or paid by a VAT-registered person on importation of goods or local purchases of goods, properties, or services, including lease or use of properties, in the course of his trade or business. It shall also include the transitional input tax and the presumptive input tax determined in accordance with Sec. 111 of the Tax Code.

It includes input taxes which can be directly attributed to transactions subject to the VAT plus a ratable portion of any input tax which cannot be directly attributed to either the taxable or exempt activity.

Any input tax on the following transactions evidenced by a VAT invoice or official receipt issued by a VAT-registered person in accordance with Secs. 113 and 237 of the Tax Code shall be creditable against the output tax:

a. Purchase or importation of goods

i. For sale; or

ii. For conversion into or intended to form part of a finished product for sale, including packaging materials; or

iii. For use as supplies in the course of business; or

iv. For use as raw materials supplied in the sale of services; or

v. For use in trade or business for which deduction for depreciation or amortization is allowed under the Tax Code,

b. Purchase of real properties for which a VAT has actually been paid;

c. Purchase of services in which a VAT has actually been paid;

d. Transactions “deemed sale” under Sec. 106 (B) of the Tax Code;

e. Transitional input tax allowed under Sec. 4.111 (a) of these Regulations;

f. Presumptive input tax allowed under Sec. 4.111 (b) of these Regulations;

g. Transitional input tax credits allowed under the transitory and other provisions of these Regulations.

6.3 Allocation of input tax credits

Based on Section 4.110-4 of RR No. 16-05, as amended by Section 17 of RR No. 04-07, a VAT-registered person who is also engaged in transactions not subject to VAT shall be allowed to recognize input tax credit on transactions subject to VAT as follows:

1. All the input taxes that can be directly attributed to transactions subject to VAT may be recognized for input tax credit; provided, that input taxes that can be directly attributable to VAT taxable sales of goods and services to the Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall not be credited against output taxes arising from sales to non-Government entities; and

2. If any input tax cannot be directly attributed to either a VAT taxable or VAT-exempt transaction, the input tax shall be pro-rated to the VAT taxable and VAT-exempt transactions and only the ratable portion pertaining to transactions subject to VAT may be claimed as input tax credit.

6.4 Amount of Input Tax Credits that may be claimed

Input taxes on the Company’s purchases of goods and services attributable/allocable to sales subject to 12% / 0% VAT, which are separately indicated in the VAT invoice/VAT OR issued by its suppliers may generally be claimed as input tax credits. On the other hand, in the case of importations, the input tax shall be the VAT paid as evidenced by the import entry declaration duly received by the BOC and official receipts issued by BOC.

6.5 Timing of Claiming of Input Tax

The input taxes shall also be claimed in the quarter when the supporting document (e.g., invoices, official receipts, IEIRD, SAD and SSDT) are dated. Specifically, the input tax on purchase of goods or properties or services shall be creditable to the Company as follows:

a. On purchase of goods or properties – upon consummation of the sale (and the VAT invoice is issued by the seller);

b. On purchase of capital goods– spread evenly over 60 months or over the useful life of such asset, whichever is shorter if the aggregate acquisition cost of which (exclusive of VAT) in a calendar month exceeds ₱1 Million (until December 31, 2021). Otherwise, upon consummation of the sale (and the VAT invoice is issued by the seller) Section 4.110-3(c) of RR No. 13-2018 provides that the amortization of the input VAT shall only be allowed until December 31, 2021 after which taxpayers with unutilized input VAT on capital goods purchased or imported shall be allowed to apply the same as scheduled until fully utilized;

c. On importation of goods or properties – upon payment of VAT prior to the release of goods from the custody of the Bureau of Customs (BOC);

d. On purchase of services – upon payment of the compensation, rental, royalty or fee (and the VAT OR is issued by the seller).

7. VAT on sale to the Government (as payments from the government)

The government or any of its political subdivisions, instrumentalities or agencies including government-owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and/or of services taxed at 12% VAT pursuant to Sections 106 and 108 of the Tax Code, deduct and withhold a final VAT due at the rate of 5% of the gross payment thereof.

WVAT will depend on when the collection was made (prior or after January 31, 2021 where there was a shift from final to a creditable system). Please note that prior January 31, 2021, there is a need to compute for the 7% standard input VAT, for which the difference over 5% should be closed to income/expense for Income Tax purposes.

The same was also discussed in RMC No. 36-2021, beginning January 1, 2021, the 5% withholding VAT on payments of goods and services from the government or any of its political subdivisions, instrumentalities agencies, including government-controlled corporations (GOCCs) shall shift from final to a creditable system. Under this new system, there will be no more standard input VAT as the actual input VAT attributable to the sale to government will now be allowed to be deducted from output VAT.

8. Computation of monthly/quarterly VAT liability On sale of goods and services, the basic formula for the computation of VAT payable during the month/quarter is as follows: Gross Sales (exclusive of VAT ) xxx Multiply by 12% Output Tax xxx Input tax credits where no claim for refund or tax credit is made: Carried over from previous month/quarter Xxx On local purchases of goods and services Xxx On importations Xxx Less: Deferred input VAT on purchases of capital goods (xxx) (xxx) VAT Payable (excess input tax credit) xxx In the event the excess input tax credits arise, the Company has the following options: a. Carry forward and apply such excess against output taxes in the subsequent months or quarters, or b. Apply for the issuance of a tax credit certificate or claim for refund for the input taxes paid on qualified transactions.

9. Claim for refund or tax credit certificate of excess creditable input taxes

Under Section 112 of the Tax Code, as amended by Section 36 (A) of RA 10963, for zero-rated sales, any VAT-registered person may apply for the issuance of a tax credit certificate or refund of creditable input taxes due or paid attributable to zero-rated sales to the extent that such input taxes have not been applied against output tax. The application for refund should be made within (two) 2 years after the close of the taxable quarter when the sales were made.

10. Invoicing requirements A VAT-registered person shall issue:

a) A VAT invoice for every sale, barter or exchange of goods or properties; and

b) A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services.

The VAT invoice and VAT official receipt must show the following (Section 4.113-1 of RR No. 16-05):

i. the name, TIN and address of the Company;

ii. date of transaction;

iii. nature of transaction;

iv. the name, TIN, business style, if any, and address of the VAT-registered purchaser, customer or client;

v. the imprinted word “zero-rated” (for VAT zero-rated transactions);

vi. the imprinted word “VAT-exempt sale”(for VAT-exempt sales)

vii. the invoice value or consideration.

Moreover, if the sale involves goods, properties or services some of which are subject to and some of which are VAT zero-rated or VAT-exempt, the invoice or receipt shall clearly indicate the break-down of the sale price between its taxable, exempt and zero-rated components, and the calculation of the VAT on each portion of the sale shall be shown on the invoice or receipt. The seller has the option to issue separate invoices or receipts for the taxable, exempt, and zero-rated components of the sale.

The invoice or official receipt shall be prepared at least in duplicate, the original to be given to the buyer and the duplicate to be retained by the Company as part of its accounting records.

Section 4.113-4 of RR No. 16-05 provides that if a VAT-registered person issues a VAT invoice or VAT OR for a VAT-exempt transaction, but fails to display prominently on the invoice or receipt the words “VAT-exempt sale”, the transaction shall become taxable and the issuer shall be liable to pay VAT thereon. The purchaser shall be entitled to claim an input tax credit on his purchase. Moreover, in VAT Ruling No. 20-91 dated April 1, 1991, the BIR ruled that a company may be assessed of deficiency VAT for the issuance of VAT ORs to document non-VAT transactions because this may mislead the payor into claiming input taxes.

11.1 Required Attachments to the VAT Declaration and Returns

i. Quarterly Lists of Sales, Purchases, Importations which must contain TIN, registered name of the payor/payee, among others

ii. Copy of Monthly Remittance Return of Value-added Tax and Other Percentage Taxes Withheld (BIR Form 1600), if applicable

11.2 No-Payment Returns

The Company should still file a VAT return (if it is VAT-registered) even if there is no payment.

All “no-payment” (refundable, breakeven, exempt and no operation/transaction) returns including returns to be paid on 2nd installment, withholding tax returns (WTRs) covered by Tax Remittance Advice (TRA) and returns paid through a Tax Debit Memo (TDM)/Credit Memo (CM) shall be filed with and accepted by the concerned RDO where the taxpayer is registered.

However, no payment returns filed late shall be filed with the AAB or Collection Officer/Deputized Municipal Treasurer, where there are no AABs, for payment of necessary penalties.

(RMO No. 32-2000)

WITHHOLDING VAT (WVAT)

Under Section 4.114-2(b) of RR No. 16-05, payments by a private corporation to non-residents for services rendered in the Philippines shall be subject to 12% withholding VAT.

In remitting VAT withheld, the withholding agent shall use BIR Form No. 1600 Remittance Return of VAT and Other Percentage Taxes Withheld. VAT withheld and paid for the non-resident recipient (remitted using BIR Form No. 1600), which VAT is passed on to the resident withholding agent by the non-resident recipient of the income, may be claimed as input tax by said VAT-registered withholding agent upon filing his own VAT Return, subject to the rule on allocation of input tax among taxable sales, zero-rated sales and exempt sales. The duly filed BIR Form No. 1600 is the proof or documentary substantiation for the claimed input tax or input VAT.

Nonetheless, if the resident withholding agent is a non-VAT taxpayer, said passed-on VAT by the non-resident recipient of the income, evidenced by the duly filed BIR Form No. 1600, shall form part of the cost of purchased services, which may be treated either as an “asset” or “expense”, whichever is applicable, of the resident withholding agent.

VAT withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made.

B. Other Percentage Tax (OPT)

OPT is a form of business tax. It is a tax imposed on persons, entities, or transactions whose sales or receipts are exempt from the payment of value-added tax and who is not a VAT-registered person.

• Percentage Tax on Domestic Carriers and Keepers of Garages – 3% of quarterly gross receipts

• Percentage Tax on International Carriers – 3% of quarterly gross receipts on both international air and shipping carriers • Tax on Franchises –

a. 3% on radio and/or television broadcasting companies, not exceeding 10 million pesos

b. 2% on gas and water utilities

• Tax on Overseas Dispatch, Message or Conversation Originating from the Philippines

– 10 % of the amount paid for such services. Exemptions: Government, Diplomatic Services, International Organizations, and News Services

• Tax on Banks and Non-Banks Intermediaries Performing Quasi-Banking Functions a. On interest, commission, and discounts from lending activities as well as income from financial leasing, on the basis of remaining maturities of instruments from which such receipts are derived: Maturity period is five years or less

– 5% Maturity period is more than five years

– 1% b. 0% on dividends and equity shares and net income of subsidiaries

c. 7% on royalties, rentals of property, real or personal, profits, from exchange and all other items treated as gross income under Section 32 of this Code

d. 7% on net trading gains within the taxable year on foreign currency, debt securities, derivatives, and other similar financial instruments

• Tax on Other Non-Bank Financial Intermediaries – 5% on the gross receipts from interests, commissions, discounts and all other items treated as gross income That interests, commissions and discounts from lending activities, as well as income from financial leasing; Maturity period is five years or less 5% Maturity period is more than five years 1% (See RR 10-04 and RMC 73-04) • Tax on Life Insurance Premiums – 2 % of the total premium collected

• Tax on Agents of Foreign Insurance Companies – 5 % on premiums paid

• Amusement Taxes

a. 18 percent in the case of cockpits;

b. 18 percent in the case of cabarets, night or day clubs;

c. 10 percent in the case of boxing exhibitions: Provided, however, That boxing exhibitions wherein World or Oriental Championships in any division is at stake shall be exempt from amusement tax: Provided, further, That at least one of the contenders for World or Oriental Championship is a citizen[s] of the Philippines and said exhibitions are promoted by a citizen/s of the Philippines or by a corporation or association at least sixty percent (60%) of the capital of which is owned by such citizens;

d. 15% in the case of professional basketball games as envisioned in Presidential Decree No. 871: Provided, however,

That the tax herein shall be in lieu of all other percentage taxes of whatever nature and description; and

e. 30% in the case of Jai-Alai and racetracks – of their gross receipts, irrespective, of whether or not any amount is charged for admission.

• Gaming Tax on Services Rendered by Offshore Gaming Licensees – RR 20-2021 provides that 5% based on entire gross gaming revenue or receipts or the agreed predetermined minimum monthly revenue or receipts from gaming, whichever is higher, in lieu of all other direct and indirect internal revenue taxes and local taxes, with respect to gaming income. Provided, That the gaming tax shall be directly remitted to the Bureau of Internal Revenue not later than the 20th day following the end of each month. Tax on Winnings

a. 10 percent in horse races,

b. 4 percent rate from double, forecast/quinella and trifecta bets,

c. In the case of owners of winning race horses, the tax shall be ten percent (10%) of the prizes.

• Sale, barter, exchange or other disposition of shares of stock listed and traded through the Local Stock Exchange other than the sale by a dealer of securities. – Six-tenths of one percent (6/10 of 1%) of the gross selling price • Repealed under Section 6 of Republic Act No. 11494, otherwise known as the “Bayanihan to Recover As One Act.” Sale, barter or exchange or other disposition through: • Initial Public Offering (IPO) – the issuing corporation shall pay the imposed tax • Secondary Public Offering – the seller shall pay the imposed tax Gross selling price or gross value in money Proportion of disposed shares to total outstanding shares after the listing in the local stock exchange: • Up to 25% – 4 % • Over 25% but not over 33 1/3% – 2 % • Over 33 1/3% – 1 %

Standard rate: 2. Tax Rate • Subject to 12% VAT • Subject to 0% VAT • Exempt from VAT

Filing and payment: A. Filing and Payment for VAT 1. Optional Filing and Payment of Monthly VAT Declarations Please be informed that the Bureau of Internal Revenue (BIR) has issued Revenue Memorandum Circular (RMC) No. 52-2023, issued on May 10, 2023, which states that the Company may opt to file and pay their VAT liabilities on a monthly basis. 2. Monthly VAT Declarations BIR Form 2550M – Monthly Value-Added Tax Declaration (February 2007 ENCS) Deadline • Manual Filing – Not later than the 20th day following the end of each month • Through Electronic Filing and Payment System (eFPS): Business Industry Period for filing Monthly VAT Declarations Group A – 25 days following the end of the month Insurance and Pension Funding Activities Auxiliary to Financial Intermediation Construction Water Transport Hotels and Restaurants Land Transport Group B – 24 days following the end of the month Manufacturing Companies, in general Group C – 23 days following the end of the month Retail Sale Wholesale Trade and Commission Trade Sale, Maintenance, Repair of Motor Vehicle, Sale of Automotive Fuel Collection, Purification and Distribution of Water Computer and Related Activities Real Estate Activities Group D- 22 days following the end of the month Air Transport Electricity, Gas, Steam & Hot Water Supply Postal & Telecommunications Publishing, Printing & Reproduction of Recorded Media Recreational, Cultural & Sporting Activities Recycling Renting of Goods & Equipment Supporting & Auxiliary Transport Services Group E – 21 days following the end of the month Activities of Membership Organizations, Inc. Health and Social Work Public Admin & Defense Compulsory Social Security Research and Development Agricultural, Hunting, and Forestry Farming of Animals Fishing Other Service Activities Miscellaneous Business Activities Unclassified

________________________________________

3. Quarterly Value-Added Tax Return BIR Form No. 2550Q – Quarterly Value-Added Tax Return (February 2007 ENCS)

Reminders:

• Under Revenue Regulations No. 8-2002 Section 4.110-1 (D), only one consolidated Monthly VAT Declaration/Quarterly VAT Return shall be filed covering the results of operation of the head office as well as the branches for all lines of business subject to VAT.

• The Quarterly Summary Lists of Sales and Purchases shall be submitted through electronic filing facility for taxpayers under the jurisdiction of the Large Taxpayers Service (LTS) and those enrolled under the eFPS. In addition, it shall be submitted the corresponding Summary List of Sales and Purchases/Importation (SLSP/I) and Monthly Alphalist of Payees (MAP) of the said transaction subjected to VAT and WVAT and email the DAT files to esubmission@bir.gov.ph in compliance with RR No. 1-2014.

Deadline

Within twenty-five (25) days following the close of the taxable quarter We discuss below transactions subject to VAT. B. Filing and Payment for OPT • BIR Form 2551Q – Quarterly Percentage Tax Return – The return shall be filed and the tax paid within twenty-five (25) days after the end of each taxable quarter. • BIR Form 2552 – Percentage Tax Return for Transactions involving Shares pf Stock Listed and Traded Through the Local Stock Exchange or Through Initial and/or Secondary Public Offering

1. For tax on sale of shares of stocks listed and traded through the local stock exchange (LSE) – within five (5) banking days from the date of collection.

2. For tax on shares of stocks sold or exchanged through primary offering – within 30 days from the date of listing in the LSE.

3. For tax on shares of stocks sold or exchanged through secondary public offering – within five (5) banking days from the date of collection. • BIR Form 2553 – Return of Percentage Tax Payable under Special Law – On or before the due date for payment of tax as stated in the Special Law

Social security contributions

	Employer	Employee
	Rate (%)	Rate (%)
Band 1	0	0
Band 2	0	0
Band 3	0	0

Other taxes

Immovable property taxes: Real Property Tax (RPT) is an ad valorem tax levied on real properties, such as lands, buildings and other improvements, and machineries. It is imposed and collected annually by provinces, cities, and municipalities (Republic Act 7160, Sec. 233). Classes of Real Property for Assessment Purposes: Real property shall be classified as residential, agricultural, commercial, industrial, mineral, or special. The city or municipality within the Metropolitan Manila Area, through their respective Sanggunian, may classify lands in accordance with their zoning ordinances. Actual Use of Real Property as a Basis for Assessment: Real Property shall be classified, valued, and assessed on the basis of its actual use regardless of where located, whoever owns it, and whoever uses it. Imposition of Real Property Tax: A province or city or a municipality within the Metropolitan Manila Area shall fix a uniform rate of basic real property tax applicable to their respective localities as follows: a. Province – not exceeding 1% of the assessed value of real property. b. City or a municipality within the Metropolitan Manila Area – not exceeding 2% of the assessed value or real property.

Stamp duty: Documentary Stamp Tax (DST) is a tax on documents, instruments, loan agreements and papers evidencing the acceptance, assignment, sale, or transfer of an obligation, right or property incident thereto. When and Where to File? The return shall be filed within five (5) days after the close of the month when the taxable document was made, signed, issued, accepted, or transferred or upon remittance by revenue collection agents of collection from the sale of loose documentary stamps. The return shall be filed with the Authorized Agent Bank (AAB) within the territorial jurisdiction of the Revenue District Office where the residence or place of business of the taxpayer is located or where the collection agent is assigned. In places where there are no AABs, the return shall be filed directly with the Revenue Collection Officer (RCO) within the Revenue District Office which has jurisdiction over the residence or place of business of the taxpayer or where the collection agent is assigned. When and Where to Pay? Upon filing of this return, the total amount payable shall be paid to the AAB where the return is filed within five (5) days after the close of the month when the taxable document was made. In places where there are no AABs, the tax shall be paid with the Revenue Collection Officer who shall issue an Electronic Revenue Official Receipt (eROR) therefore.

Other: Local Business Tax: The municipalities within the Metropolitan Manila Area may levy taxes at rates which shall not exceed by fifty percent (50%) the maximum rates prescribed under Sec. 143 of the Local Government Code of the Philippines (LGC). Tax and Manner of Payment: The tax period for local business taxes shall be the calendar year. It may be paid in quarterly installments. Accrual of Tax: All local taxes, fees, and charges shall accrue on the first (1st) day of January of each year. However, new taxes, fees or charges, or changes in the rates thereof, shall accrue on the first (1st) day of the quarter next following the effectivity of the ordinance imposing such new levies or rates.