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Doing
Business in
the
Philippines
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2009 edition
Foreword
The Philippines has long opened its doors to embrace global
economic interconnectedness. As the world economy shrinks, that
is to say cross border transactions and investments have indeed
resulted in close trade relationship among countries, the need for a
global network which will provide consistent advice has never been
more apparent. RSM International makes a difference worldwide as
it is a global network composed of independently owned and
managed professional service firms, united by a common desire to
provide the highest quality service to their clients.
Alas, Oplas and Co. CPAs, an independent member firm of RSM
International, came up with this publication to give its clients,
prospective investors, and the general public broad insights about
the Philippines. It contains general information about laws,
legislations, and tax guidelines governing local business. Its main
goal is to provide significant yet concise information about the
potential opportunities on the different sectors of the Philippine
economy and to provide investors with the general guidelines of
starting a business locally.
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Contents
General 4
Types of Business Entities 8
Foreign Exchange Controls 14
Taxation
18
Employment 58
Accounting 68
Intellectual Property Rights (IPR) 70
Asset Valuation 73
Investing in the Philippines 74
Listing Rules in the Philippines 80
Relevant Websites89
About RSM International 91
About Alas, Oplas & Co., CPAs
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GeneralThe Philippines is one of the countries in Southeast Asia which is
located in the Pacific Rim of Fire. It is an archipelago composed of
7,100 islands and islets. The country has a total land area of 30
million hectares or 300,000 square kilometers and the three biggest
islands commonly inhabited by people are Luzon. Visayas, and
Mindanao. Its archipelagic nature makes the worlds 5th longest
coastline; it has a coastline of about 36, 300 kilometers. Three
prominent bodies of water surrounded the archipelago: the PacificOcean on the east, the South China Sea on the west, and the
Celebes Sea on the south.
One advantage of the Philippines being an archipelago is that it
offers diverse natural resources, from land to marine to mineral
resources. It is also the biggest copper producer in Southeast Asia
and producer of gold in the world. A home to 2, 145 fish species and
its 7, 100 islands boast of beautiful beaches and breathtaking
sceneries offer leisure and relaxation spots for vacationists and
tourists.
The Philippines has a tropical climate with relatively abundant
rainfall and gentle winds. There are three pronounced seasons: (1)
the wet or rainy season from June to October, (2) the cool, dry
season from November to February, (3) and the hot, dry season
from March to May.
Filipinos are divided geographically and culturally into regions, and
each regional group is recognizable by distinct traits and dialects.
The projected Philippine population as of August 1, 2007 was 88.57million. From 2000 to 2007, it has a growth rate of 2.04 percent per
year, or an absolute increase of around 1.81 million per year, net of
death and migration. As the country is physically divided, people
created their racial identity through ethnic groups. The biggest
ethnic group is Chinese Malay which comprises 91.5%, 4 % Muslim
Malay, 1.5% Chinese, and others belong to the remaining 3%.
Filipinos use the two official languages, Filipino and English. Filipino
is the native language used nationally as a language of
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communication among ethnic groups while English is also widely
used as a medium of instruction in higher education and in business
trades. There are eight major dialects spoken by majority of the
Filipinos: Tagalog, Cebuano, Ilocano, Hiligaynon or Ilonggo,
Bicolano, Waray, Pampango, and Pangasinense. Eighty-five percent
of the Filipino is predominantly Catholic while the Muslims
constitute of about 5 percent of the population. The remaining 10
percent belongs to other religious groups.
The Philippine education system is patterned after the American
education system and follows four stages of formal education: pre-
primary level, six years of primary education, four years of
secondary education, and college education.
According to the census conducted by the government in 2006,
electronic products still accounted for the majority of the export
products (62.6%), followed by articles of apparel and clothing
accessories (5.6%); cathodes and sections of cathodes refined
sugar (2.6%); woodcrafts and furniture (2 %); and petroleum
products (1.9%). Meanwhile, the top products imported by the
country are also the electronic products (47.2%), followed by
mineral fuel, lubricants, and related materials (15.4%); transport
equipment (3.9%); industry machinery and equipment (3.8 %); ironand steel (2.3%), and textile yarn, fabrics, made up articles, and
related products (2.2%).
The Philippines has a well-developed communication,
transportation, business and economic infrastructure that makes it
an ideal destination for operations of global business. It is highly
accessible to the world by air, water, and cyberspace. Most major
airlines have multi-weekly flights in and out of Metro Manila, and to
key cities in United States, Europe, and Middle East. The country
has eight (8) international airports and over 200 airports thatconnect destination across islands. In key economic areas, some of
Philippine harbors have already been developed into modern ports
and container terminal that play host to national and international
trade. Furthermore, the three main islands of the country, Luzon,
Vizayas, and Mindanao, are made accessible by roads, waterways,
and airports.
Despite more modest infrastructure capabilities, the Philippines
assures investors of efficiently communicating their business
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message to the rest of the world through world-class transmission
facilities. The countrys communication infrastructure is well-
developed and expanding, a high quality, low cost bandwidth
domestic network, with six available platforms: fixed line, cellular,
cable TV, over the air TV and radio, and the VSAT system.
Economy
The Philippine economy is considered a mixed economic system,
which means it may feature both capitalism and socialism. The
country is considered by International Monetary Fund (IMF) as a
fastest growing economy is Southeast Asia as the country posted a
real GDP growth of 7.3% in 2007. For 2008, the countrys real GDPincreased by 4.5 percent. Based on the NSO Labor Force Survey in
2008, the full year economic growth increased labor employment by
530,000. The employment created was based on services which
served as the countrys primary growth driver. In response to the
global economic crisis, the government is partnering with private
sector for infrastructure projects. Ownership of dwellings and real
estate, business process outsourcing, agriculture,
healthcare/medical tourism, and tourism are the positive prospects
that could help the economy to remain resilient and prepare for
eventual economic rebound.
Further, based on the Inflation Report of Bangko Sentral ng Pilipinas
(BSP), even though inflation decelerated further in the 4th quarter of
2008, inflation outlook is much more favorable as the emerging
forecasts showed a downward shift in the inflation path to settle the
target ranges for both 2009 and 2010, driven mainly by the
expected easing of world oil prices, the lower-than-expected
inflation outturn for Q4 2008, and the impact of transport fare
reductions. Retreating prices and commodities and the recent string
of low inflation numbers should relieve inflationary pressures and
keep the public inflations expectations at bay.
As of 4th quarter of 2008, total approved Foreign Direct Investments
(FDI) declined significantly by 79.2% to Php21.4 billion in the fourth
quarter of 2008 from a higher level of Php102.6 billion in the same
quarter a year ago. On the other hand, the 2008 annual FDI reached
Php182.7 billion, lower by 14.7 % than the Php214.1 billion
approved in 2007. Almost all (99.2%) of foreign and Filipino
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investments approved during the quarter were coursed through BOI
and PEZA.
Administration
The 1987 Constitution provides a presidential system of
government with bicameral parliament and three equal branches:
(1) the Executive, (2) the Legislative, and (3) the Judiciary. As
defined, the Legislature makes the law, the Judiciary interprets the
law (if consistent with the Constitution), and the Executiveimplements the law.
The Executive is composed of the Office of the President (OP), Vice
President, Cabinet officials of the 21 departments, about 3 or 4
dozen Presidential advisers and consultants, and several ad-hoc
task forces and commissions. The President makes Executive
Orders (EOs), administrative orders (AOs), and other ordinances.
The 21 departments and its attached agencies create and issue its
own AOs, Memorandum Circulars (MCs) and related ordinances.
The Legislative is composed of the Senate and the House of
Representatives. The upper chamber is composed of 24 Senators
elected nationwide and have a term of 6 years with one term for re-
election. The lower chamber is composed of more than 260
Congressmen/women, about 230 elected in various legislative
districts, and about 30 elected by party-list system for the
marginalized sectors and small political parties.
TheJudiciary is composed of the Supreme Court, Appellate courts
and lower courts.
Local government units (LGUs) are currently composed of 81
provinces, 131 cities, 1,497 municipalities, and almost 42,000
barangays or villages. Each of these units has its own local policy-
making councils.
The Philippine Constitution is the fundamental law of the state.
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Local Customs
The regular working day is consisted of eight (8) hours. Bankinginstitutions can be flexible with their own business hours; however,
the time should not be lesser than six (6) hours a day, anytime
between 8 a.m. to 5 p.m. Generally, commercial banks transact
from 9 a.m. to 3 p.m. and savings bank from 9 a.m. to 5p.m.
Government and private offices are open from 8 a.m. to 5 p.m.,
from Monday to Friday, with one hour lunch break from 12 p.m. to 1
p.m. Several private offices are open on Saturday.
There are eleven (11) regular holidays and (3) special non-workingholidays. These holidays are shown further on this reading.
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Types of Business Entities
Generally, there are three forms of business organization in the
Philippines.
Sole Proprietorship
Type of business entity which there is only one owner and he has
the final word taking all decisions by himself. All debts of the
business are debts of the owner and must pay from his personal
possessions. This means that the owner has unlimited liability.
To form a sole proprietorship, there is a need to apply for a business
name and register at the Department of Trade and Industry (DTI).
PartnershipType ofbusinessorganization in which two or more individuals pool
money, skills, and other resources, and share profit and loss in
accordance with terms of the partnership agreement.
In forming the latter with 3,000.00 Philippine pesos or more in
capital, you must register with the Securities and Exchange
Commission (SEC).
Corporation
A corporation is an artificial being created by operation of law,
having the right of succession and the powers, attributes and
properties expressly authorized by law or incident to its existence.
Foreign Investment Entities
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These are equity investments made by non- Philippine nationals in
the form of foreign exchange and/ or other assets actually
transferred to the Philippines and duly registered with the Central
Bank which shall assess and appraise the value of such assets other
than foreign exchange.
They are allowed to set up the following form of business entities:
Foreign Investment in Export Enterprise
An enterprises wherein a manufacturer, processor or service
(including tourism) enterprises exports sixty percent (60%) or more
of its output, or where in a trader purchases products domesticallyand exports sixty percent (60%) or more of such purchases.
The enterprise whose products and services do not fall within List A
and B of Foreign Investment Negative List is allowed up to one
hundred percent (100%) ownership.
The same shall register with the Board of Investment (BOI) and
submit the reports that may be required to ensure continuing
compliance of the export enterprise. In case when the export
enterprises fail to meet the export ratio requirement, the BOI shalladvise the Security and Exchange Commission (SEC) and Bureau of
Trade Regulation and Consumer Protection (BTRCP). Thus, both
agencies shall order the non-complying export enterprises to
reduce its sales to the domestic market to not more than forty
percent (40%) of its total production. Failure to comply with such
order without justifiable reason may subject the enterprise in
cancellation of SEC or BTRCP registration and other appropriate
penalties.
Foreign Investments in Domestic MarketEnterprises
Enterprises which produces goods for sale, or renders services to
the domestic market entirely or if exporting a portion of its output
fails to consistently export at least sixty percent (60%) or more of
such purchases.
Non-Philippine nationals may own up to one hundred percent
(100%) of domestic enterprises unless foreign ownership is
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prohibited or limited by the Constitution and existing law or the
Foreign Investment List. Moreover, a domestic market enterprise
may change its status to export enterprise if over a three-year
period; the former consistently exports sixty percent (60%) or more
of its output each year.
Audit Requirements
A statutory audit is required for all corporations with authorized
capital stock or paid-up capital exceeding P50, 000, including
branches of foreign corporations. It is also required for any
corporation whose gross sales or earnings exceed P150, 000 in any
quarter.
Incorporation of Business Entities-
Approval & Registration
Corporation
Formation procedures
The formation of corporations is governed by the Corporation Code.
However, if foreign investors are to own shares in a corporation, the
Foreign Investments Act of 1991 will also be relevant, as it places
constraints on foreign ownership in enterprises engaged in certain
activities.
Registration Requirements
Corporate existence and juridical personality commences from the
date the Securities and Exchange Commission (SEC) issues acertificate of incorporation. However, before a corporation may
commence operations in the Philippines, it must also register with
the Bureau of Internal Revenue (BIR), the Social Security System
(SSS), the Home Development Mutual Fund (HDMF), the Philippine
Health Insurance Corporation (PhilHealth), and the local
government unit where its principal office will be located.
Registration with the SEC and other government agencies usually
takes six to eight weeks in total to complete.
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To establish a corporation, between five to 15 individuals must act
as incorporators. They must each own or subscribe to at least one
share, and a majority of them must be residents of the Philippines.
At least 25% of the authorized capital stock must be subscribed at
the time of incorporation, and at least 25% of that subscribed stock
must be paid. However, when the capital stock consists of no-par
value shares, the subscriptions must be paid in full.
Once incorporation formalities are completed, the incorporators
may sell their shares. The corporation will still need to retain at
least five shareholders, as it must have at least five directors, each
of whom must hold at least one share.
Among the more important documents required to be filed with the
SEC on applying for incorporation are the articles of incorporation,
by-laws, and the treasurer's affidavit indicating that the necessary
capital has been subscribed and paid up.
Formation Costs
The cost of registering a corporation will depend on its capital
structure. Filing fees with the SEC are 0.2% of the authorized capitalstock for the corporation, while nominal filing fees will also be
payable to the relevant local government unit.
The original issue of shares of stock is also subject to a
documentary stamp tax equivalent to 0.5% of the par value of the
shares. There are also charges for the other government agencies,
but the amounts involved are minimal.
Public Disclosure of Information Requirements
The SEC requires the submission of audited financial statements by
stock corporations with paid-up capital of at least P50, 000. The
statements must also be accompanied by a statement by
management that it takes responsibility for the information and
representations in the financial statements.
In addition, corporations are required to file annual information
sheets with the SEC, providing information on the corporation's
general profile, such as the names of directors and officers,
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stockholders and capital composition, investments, treasury shares,
retained earnings, and dividends.
All information filed by corporations is available at the SEC for
public inspection.
Partnership
A partnership has a separate legal personality from that of each of
the partners. A partnership will be either general or limited,
depending on the liability of the partners. A partnership is general
when all the partners are personally liable for the contracts of the
partnership once its assets are exhausted. In a limited partnership,at least one partner has unlimited personal liability, but the liability
of other partners is limited to the amount of their capital
contributions.
A partnership is the legal entity commonly used by professionals
seeking to exercise their common profession, such as accountants
and lawyers. For tax purposes, they are referred to as "general
professional partnerships," and are taxed as conduit vehicles, rather
than as corporations as is the case for other partnerships. Under the
Civil Code, however, they are treated as any other partnership.
Partnerships are not commonly used as business entities, other
than by professional firms. In general, any person who can enter
into contractual relations may become a partner. A partnership can
also become a partner in another partnership, either with natural
persons or with other partnerships. As a matter of public policy, a
corporation may not be a partner in a partnership.
However, the SEC may allow a corporation to become a partner in a
partnership where the contract of partnership provides that it is tobe managed jointly by all the partners and that the partners are to
be collectively liable to partnership creditors. The corporation must
also be permitted to enter into a partnership by its articles of
incorporation.
A partnership with more than P3, 000 in capital must register with
the SEC. Registration follows the pattern outlined above for
corporations. The filing fee for the articles of partnership is the
greater of P1, 000 or 0.2% of the partnership capital.
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Partnerships are subject to the same record keeping and statutory
audit requirements as corporations.
Sole Proprietorship
Sole proprietors must register with the Bureau of Trade Regulations
and Consumer Protection of the Department of Trade and Industry,
as well as the appropriate local government unit. They are not
usually subject to the regulations and requirements governing
corporations and partnerships in the operation of their business.
However, if the activity involves the practice of a profession
included in the Foreign Investments Negative List (FINL),
registration of an alien individual will not be allowed.
Liquidation/Receivership
Corporations may be dissolved for any of the following causes:
Expiration of the period provided for in the articles of
incorporation
Enactment of a special law requiring dissolution
A judicial decree of forfeiture
Failure to organize and commence business within two
years from the date of incorporation
Inoperative for five years after it has commenced
operations
Voluntary dissolution, judicial or extra-judicial
Corporate assets may be liquidated by the corporation itself
through the board of directors and creditors, by receivership, or by
trusteeship. Liquidation through the board of directors takes three
years from corporate dissolution. Liquidation by receivership and
trusteeship may extend beyond three years. Under the trust-fund
doctrine, impairment of capital is prohibited, principally to protect
the corporation's creditors. Upon dissolution, the right of
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shareholders to the distribution of corporate assets is subordinated
to the rights of the creditors.
The interests of the shareholders in the remaining assets are in
proportion to their shareholdings, in the absence of any contrary
provision in the articles of incorporation and in the certificates of
stock. Holders of stocks preferred as to assets must be paid before
holders of common stock and holders of stocks preferred as to
dividends.
As an alternative to dissolution, a financially distressed company, or
creditor(s) holding at least 25% of the company's total liabilities,
may appeal to the Regional Trial Court to place the company under
corporate rehabilitation. The Court will then, within five days,
appoint a rehabilitation receiver, suspend the enforcement of claims
against the company and forbid the company from making any
payment of its outstanding obligations until the court can review
the petition.
Thus court proceedings can be tedious and lengthy, and do not
guarantee recovery. Because of these shortcomings, most secured
creditors would prefer to ensure timely recovery by enforcing their
rights over the collateral through the foreclosure of mortgages.Unsecured creditors, by contrast, tend to pursue informal "workout
agreements" with the company.
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Foreign Exchange Controls
(ForEx)
The Philippines official currency is Philippine Peso (Php), and the
Bangko Sentral ng Pilipinas (BSP) has the sole power and authorityto issue the currency within the territory of the Philippines. The BSP
issues notes and coins for circulation in the Philippines. It also
issues legal tender commemorative notes and coins.
Foreign Exchange Policy (Bangko
Sentral ng Pilipinas)
At present, the countrys exchange rate policy supports a freely
floating exchange rate system whereby the BSP leaves the
determination of the exchange rate to market forces. Under a
market-determined exchange rate framework, the BSP does not set
foreign exchange rate but instead allows the value of the peso to be
determined by the supply and demand of the foreign exchange.
Reformatory measures to deregulate the Philippine foreignexchange system were implemented sometime in 1992.Consequently, foreign exchange surrender requirements were
removed, access to foreign currency deposit facilities wasliberalized, restrictions on the repatriation of foreign investmentsand/or profit remittances were lifted, and limitations on thequantitative restrictions on current account transactions deleted.
Trading Foreign Exchange in the
Market
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Ones countys banking system plays a major role on foreign
investment. The Philippines have different banks: there are
universal and commercial banks (including international banks with
officers in the country), rural banks, and credit unions covering a
wide range of banking needs. Banking in the Philippines varies
greatly between urban and rural environments. Many rural banks of
the Philippines function on the basis of mobile phone technology.
Meanwhile, urban Philippine banks function similarly to major banks
all over the world, offering personal, business, and corporate
banking services through a wide variety of means. It is also
important to keep in mind that foreigners involved in Philippine
banking are subject to government restrictions on foreign
investment. As such, foreign investors and business people need to
research banking practices thoroughly before they begin.
In the Philippines, peso-dollar trading among Bankers Association
of the Philippines (BAP) member-banks and between these banks
and the BSP are done through the Philippine Dealing System (PDS).
Most of the BAP-member banks which participate in the peso-dollar
trading use an electronic platform that allows nearly instantaneous
transmission of price and trade confirmation. Funds transfers, or the
remittances of funds from one bank to another, either locally or
internationally, in local or foreign currencies, can be recognizedthrough teletransmission, draft, managers check, or certified check
depending on the request of the applicant.
Foreign Exchange Measures
As a continuation of the foreign exchange liberalization program,
the BSP approved on 15 January 2009 the third phase of reforms,
which include the liberalization/streamlining of the rules on foreign
borrowings of private banks for relending purposes and the
registration of inward foreign portfolio investments. The third phase
of foreign exchange regulatory reforms also includes all the
provisions that are intended to improve the monitoring of foreign
exchange flows and to formalize/clarify existing practices.
Moreover, the Monetary Board (MB) approved on 23 April 2009 the
streamlining of the documentation requirements and other reforms
on the sale of the foreign exchange by foreign exchange
dealers/money changers (FXDs/MCs). The streamlining of the
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documentation requirements will make it possible for residents that
chose not to seek BSP approval and/or registration of the
loans/investments to source their foreign exchange requirements
without necessarily compromising compliance with anti-money
laundering regulations.
Registration of Foreign
Investments with BSP
Registration with the central monetary authority - Bangko Sentralng Pilipinas [BSP] - of loans and investments accounts was lifted
except in cases where funding will be made through the bankingsystem of transactions like repatriation of capital and remittances ofdividends and profits, as well as foreign exchange requirement forfuture debt.
Further, BSP approval and registration are required in case ofoutward investments of residents in an amount in excess ofUS$6,000,000.00; per investor per year should the funds thereforebe sourced from the banking system. Foreign borrowings by thepublic sector should also be approved by the BSP.
The law allows the deposit in foreign currency accounts of anyforeign exchange received in the Philippines or abroad. It alsoallows the selling and acquisition of foreign exchange outside of thePhilippine banking system. The only restriction on foreign exchangetransaction pertains to the payment of foreign loans and/or foreigninvestments, in which case, such may only be serviced with foreignexchange purchased through authorized agent banks, if the loan isapproved/registered with the BSP or the investment is register.
Thus, in case of sales of foreign exchange for payment of foreignobligations [foreign loan or foreign investment], the purchaser shall
be required by the authorized agent bank to present proof of BSPapproval and/or registration for each loan or investment.
In case of purchase of foreign exchange for any non-trade purposes,authorized agent banks may sell foreign exchange to residentswithout need of prior BSP approval subject, however, to thefollowing:
[a] Written notarized application and supportingdocuments from the foreign exchange purchaser if theamount exceeds US$25,000.00.
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[b] Simple written application if the amount does notexceed US$25,000.00.
This limitation on non-trade purchase cannot be circumvented bysplitting the foreign exchange purchase into separate smalleramounts. Splitting of purchase of foreign exchange is presumed ifthe bank sells to any purchaser, a combined total amountexceeding US$25,000.00 within a period of fifteen (15) bankingdays.
In cases of outward payments, the law does not prescribe anyparticular currency requirements. However, all foreign exchangeproceeds from exports and invisibles should be procured through
specified currencies numbering more than twenty [20].
Philippine-peso denominated bank accounts may be opened by non-residents, whether an individual or corporate, without need tosecure BSP approval. Non-resident depositors may freely withdrawtheir accounts but non-resident bank accounts may only be creditedwith the proceeds from inward foreign exchange remittance or withincome earned in the Philippines. The maintenance of foreigncurrency deposit accounts with local banks by residents and non-residents alike is not subject to any further restrictions.
Basic Requirements for BSP
Registration of Foreign
Investments
First, as a general rule, there must be an inward remittance of FX
(Foreign Exchange), which should be sold for pesos through an AAB
(Authorized Agent Banks) as evidenced by duly accomplished BSP-
prescribed Certificate of Inward Remittance of Foreign Exchange(for cash investments) or, proof of transfer of the assets invested to
the investee/beneficiary firm in the Philippines (for investment
kind).
Second, there must be evidence of receipts of the funds/assets by
the local investee/beneficiary/seller of the investment instruments
such as Sworn Certification of such receipt or issuance of shares (for
investment in stock corporations); stockholders purchase invoice or
subscription agreement (for PSE-listed shares); accredited dealers
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Confirmation of Sales (for government securities); Certificate of
Time Deposit (for peso time deposits with tenor of 90 days or
longer); and contract/certificate of investment (for money market
instruments).
Repatriation of Profit
There are no existing restrictive regulations on the repatriation offunds related to BSP-registered foreign investments such as sales ordivestment proceeds, profits, dividends, royalties, loan paymentsand liquidation. BSP registration of foreign investments is necessaryonly in cases where the foreign exchange required to service therepatriation of capital and remittance of profits, dividends, royalties,loan payments or liquidation proceeds will be sourced from thebanking system.
Further, it bears to emphasize that investments in government orlisted securities or money market instruments or bank depositsneed not be registered with the BSP or with the designatedcustodian bank of the investor concerned.
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TAXATION
Overview of Philippine Taxation
and Philippine Tax Regulation
The National Internal Revenue Code (NIRC) of 1997 contains the
laws governing taxation in the Philippines. The Bureau of InternalRevenue (BIR), which is under the Department of Finance (DOF),
administers taxation. Its main functions consist of assessment,
collection, processing, and taxpayer assistance. The BIR is headed
by a Commissioner who has exclusive and original jurisdiction to
interpret the provisions of the Code and other tax laws.
Aside from national taxes, local government units (LGUs),
promulgates its own local tax code applicable only in its jurisdiction.
The taxpayers are required to have their books of account, eithermanual books of accounts, loose leaf, or computerized accounting
system, be registered with the BIR. The taxpayers book of accounts
must be kept in its premise at all times and shall be kept in a native
language, English, or Spanish.
TYPES OF TAXES
Individual Income Tax
Individual citizen residing in the Philippines is taxable on its income
earned from all sources within and outside the Philippines; whereas,
a non-resident citizen, a resident alien, a non-resident alien
engaged on trade or business or a non-resident alien not-engaged
in trade or business, is taxable on its income earned from all
sources within the Philippines. Individual taxpayer, except non-
resident alien not engaged in trade or business in the Philippines, is
subject to the graduated rates of 5% to 32%.
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Personal exemption of Php 50,000 is allowed as a deduction to
taxable income of individual taxpayer regardless if he/she is single
or married. Individual, whether single or married, shall be allowed a
personal exemption of Php 25,000 for each qualified dependent
child, provided that the total number of dependent for which
additional exemptions may be claimed shall not exceed four (4)
dependents. In case of married individuals, only one spouse may
claim additional exemptions for qualified dependent child. A non-
resident alien engaged in trade or business shall be allowed
personal exemption subject to reciprocity rule.
Rates of Income Tax on Citizens and Resident Aliens* (In
PhP)
Amount Subject to Tax Applicable Rate
Not over P10,000 5%
Over P10,000 but not over
P30,000
P500 + 10% of the excess over
P10,000
Over P30,000 but not overP70,000
P2,500 + 15% of the excess overP30,000
Over P70,000 but not over P
140,000
P8,500 + 20% of the excess over
P 70,000
Over P140,000 but not over
P250,000
P22,500 + 25% of the excess
over P140,000
Over P250,000 but not over
P500,000
P50,000 + 30% of the excess
over P250,000
Over P500,000 P125,000 + 32% of the excess
over P500,000
*Applicable to resident citizens and resident aliens whether
engaged in trade or business, practicing profession, or employed.
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Non-resident aliens are taxed at a rate of 25% of grossincome from sources within the Philippines if their staywithin the country does not exceed 180 days in a calendar
year. Otherwise, they are taxed on the basis of graduatedrates.
Foreign nationals who are employed by regional area orregional operating headquarters of multinationalcorporations, representative offices, offshore bankingunits, petroleum service contractors and subcontractors,are subject to income tax at 15% of their gross incomefrom such employers (e.g. salaries, annuities, honoraria,and allowances).
Tax Rates on Certain Passive Income Received by a Citizen,Resident Alien Individual, and Non-Resident Alien Engagedin Trade or Business.
1. Interest from any peso bank deposit, and yield or any othermonetary benefit from deposit substitutes and from trustfunds and similar arrangements; royalties, prizes, andother winnings derived from sources within the Philippinesshall be tax at a rate of 20%;
2. Royalties on books, as well as other literary works andmusical compositions is taxed at a rate of 10%;
3. Interest income received by a resident individual taxpayerfrom a depository bank under Foreign Currency DepositSystem is taxed at a rate of 7.5%;
4. Interest income from long term deposit which was pre-terminated by the holder before the fifth (5th) year shall betaxed at a rates herein to be deducted and withheld fromthe proceeds based on the length of time the instrumentwas held by the taxpayer:
Holding Period Rate
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%
5. Cash and/or property dividends actually or constructivelyreceived from a domestic corporation, joint stock company,insurance or mutual fund companies or on the share of anindividual partner in the distributable net income after taxof a partnership (except general professional partnership)or on the share of individual in the net income after tax ofan association, a joint account or a joint venture or
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consortium of which he is a member or a co-venturer shallbe taxed at a rate of 10% except for non-resident alienengaged in trade or business which is taxed at a rate of
20%;6. Capital gains on sale of real property are taxed at 6% of
gross selling price or fair market value, whichever ishigher; and
7. Capital gains in sale of stocks.
Corporate Taxes
A domestic corporation, resident foreign corporation and otherentities treated as a domestic corporation for tax purposes, shall be
taxed at a rate of 30% on its taxable income starting January 2009;whereas, a non-resident foreign corporation shall be taxed at a rateof 30% on its gross income received during the year from allsources within the Philippines.
Minimum Corporate Income Tax (MCIT) on Domestic Corporations
and Resident Foreign Corporations. When the minimum income tax
is greater than the tax computed at the regular 30% corporate tax
rate, the minimum corporate income tax (MCIT) of two percent (2%)
of the gross income is levied at the end of the taxable year. MCIT is
imposed on a corporation beginning the fourth taxable yearimmediately following the year in which such corporation
commenced its business operations. A carry forward of excess
minimum tax is allowed wherein any excess of the minimum
corporate income tax over the regular income tax shall be carried
forward and credited against the regular income tax rate of the
three (3) immediately succeeding taxable years.
Tax Rates for Certain Domestic and Resident ForeignCorporate Taxpayers
1. Proprietary Educational Institutions and Hospitals shall be taxedat a rate of ten percent 10% on its taxable income.
2. International Carriers doing business in the Philippines is taxableat a rate of two and one-half percent (2 1/2%) on in Gross PhilippineBillings.
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3. Offshore Banking Units shall be subject to final tax at a rate often percent (10%).
4. Regional or Area Headquarter shall not be subject to income tax.
5. Regional or Area Operating Headquarters shall be taxed at a rateof ten percent (10%) of their taxable income.
6. An enterprise registered with Philippine Economic Zone Authorityand registered under Bases Development Act shall be taxed at arate of five percent (5%) on its gross income for its registeredactivities.
Tax Rates on Passive Income of Domestic/Resident
Corporation
Passive Income Tax rates
Dividends received from
domestic corporations
Not subject to tax
Interest on any currency bank
deposit and yield or othermonetary benefit from deposit
substitutes and from trust fund
and similar arrangements
20% of final tax
Interest from foreign currency
deposits with foreign currency
deposit units (FCDUs)
7 1/2% of final tax
Capital gains from the sale of
shares of stock not traded in the
stock exchange is subject to final
tax rates
a. Not over P100,000 5%
b. Amount in excess of
P100,000 10%
Capital Gains Realized from Sale,
Exchange or Disposition of Lands
and / or Buildings.
6%
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Preferential Tax Rates for Non-Resident Corporations
Tax Rates
Interest on foreign loans 20%
Dividends received form
domestic corporations
30%
Income derived form any foreign
currency transaction with FCDUs
and OBUs
Exempt
Capital gains from the sale of
shares of stock not traded in the
stock exchange is subject to final
tax rates
a. Not over P100,000
5%
b. Amount in excess of
P100,000 10%
Rents and other fees paid to non
resident corporate lessors of
aircraft, machinery, and other
equipment
7 1/2% on gross rentals or
fees
Rents of charter fees paid to
non-resident corporate owners ofvessels chartered by Philippine
Nationals
4 1/2% on gross rentals or
fees
Fees paid to non-resident
cinematographic film owners or
lessors
25% on gross income
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Improperly Accumulated Earnings Tax
A tax of ten percent (10%) shall be imposed to on the improperlyaccumulated earnings of a corporation, except in the case ofpublicly held corporations, banks and other non-bank financialintermediaries and insurance companies when the corporationsprofit or earnings exceeds its paid-up capital accumulates beyondthe reasonable needs of the business.
Branch Profit Remittance Tax
A branch office of a Foreign Company shall be subject to fifteenpercent (15%) tax on any profit remitted by a branch to its headoffice which shall be based on the total profits applied or earmarkedfor remittance without any deduction for the tax component.
Documentary Stamp Tax
Documentary Stamp Tax is a tax on documents, instruments, loanagreements, and papers and upon acceptance, assignment, sales,and transfer of the obligation, right and property and shall beimposed to the person making, signing, issuing, accepting, ortransferring the same whether the document is made, signed,issued, accepted, or transferred the obligation or right arises fromthe Philippine sources or the property is situated in the Philippines.
Tax Incentives
Deductibility of Expenses
There shall be allowed as deduction from gross income all theordinary and necessary expenses paid or incurred during thetaxable year in carrying on or which are directly attributable to, thedevelopment, management, operation and/or conduct of the trade,business or exercise of a profession, including:
a. A reasonable allowance for salaries, wages, and otherforms of compensation for personal services actually
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rendered, including fringe benefit furnished or grantedby the employer to the employee: wherein the finaltax has been paid;
b. A reasonable allowance for travel expenses, here andabroad, while away from home in the pursuit of trade,business or profession;
c. A reasonable allowance for rentals and/or otherpayments which are required as a condition for thecontinued use or possession, for purposes of the trade,business or profession, of property to which thetaxpayer has not taken or is not taking title or in whichhe has no equity other than that of a lessee, user orpossessor;
d. A reasonable allowance for entertainment,amusement and recreation expenses during thetaxable year, that are directly connected to thedevelopment, management and operation of thetrade, business or profession of the taxpayer, or thatare directly related to or in furtherance of the conductof his or its trade, business or exercise of a professionnot to exceed such ceilings.
e. Interest. The amount of interest paid or incurredwithin a taxable year on indebtedness in connectionwith the taxpayer's profession, trade or business shallbe allowed as deduction from gross income; however,
the taxpayer's otherwise allowable deduction forinterest expense shall be reduced by an amount equalto the thirty three percentages of the interest incomesubjected to final tax.
f. Taxes. Taxes paid or incurred within the taxable yearin connection with the taxpayer's profession, trade orbusiness, shall be allowed as deduction, except:
a. The income tax provided for under the Law;b. Income taxes imposed by authority of any foreign
country;
c. Estate and donor's taxes; andd. Taxes assessed against local benefits of a kind
tending to increase the value of the propertyassessed.
Credit against Tax for Taxes of Foreign Countries. If
the taxpayer signifies in his return his desire to have the
benefits, the tax imposed shall be credited with:
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a. Citizen and Domestic Corporation.b. Partnerships and Estates.
Limitations on Credit. The amount of the credit taken shallbe subject to each of the following limitations:
a. The amount of the credit in respect to the tax paidor incurred to any country shall not exceed thesame proportion of the tax against which suchcredit is taken, which the taxpayer's taxableincome from sources within such country bears tohis entire taxable income for the same taxableyear; and
b. The total amount of the credit shall not exceedthe same proportion of the tax against which suchcredit is taken, which the taxpayer's taxableincome from sources without the Philippinestaxable bears to his entire taxable income for thesame taxable year.
Proof of Credits. The credits provided shall be allowed
only if the taxpayer establishes the following:
a. The total amount of income derived fromsources without the Philippines;
b. The amount of income derived from eachcountry, the tax paid or incurred to which isclaimed as a credit; and
c. All other information necessary for theverification and computation of such credits.
g. Losses. Losses actually sustained during the taxableyear and not compensated for by insurance or other
forms of indemnity shall be allowed as deductions:
a. If incurred in trade, profession or business;b. Of property connected with the trade, business or
profession, if the loss arises from fires, storms,shipwreck, or other casualties, or from robbery,theft or embezzlement.
c. No loss shall be allowed as a deduction under if atthe time of the filing of the return, such loss hasbeen claimed as a deduction for estate taxpurposes in the estate tax return.
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Net Operating Loss Carry-Over. The net operating
loss 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 three (3) consecutive
taxable years immediately following the year of such
loss. A net operating loss carry-over shall be allowed
only if there has been no substantial change in the
ownership of the business or enterprise.
Capital Losses.The excess of the losses from sale or
exchange of capital assets over the losses from such
sales or exchange.
a. Loss from sales or Exchanges of capital assetsshall be allowed only to the extent of the gainsfrom such sales or exchange.
b. Securities becoming worthless.
Losses from Wash Sales of Stock or Securities.
a.In the case of any loss claimed to havebeen sustained from any sale or other disposition
of shares of stock or securities where it appearsthat within a period beginning thirty (30) daysbefore the date of such sale or disposition andending thirty (30) days after such date, thetaxpayer has acquired (by purchase or byexchange upon which the entire amount of gainor loss was recognized by law), or has enteredinto a contact or option so to acquire,substantially identical stock or securities, then nodeduction for the loss shall be allowed, unless the
claim is made by a dealer in stock or securitiesand with respect to a transaction made in theordinary course of the business of such dealer.
b. If the amount of stock or securitiesacquired (or covered by the contract or option toacquire) is less than the amount of stock orsecurities sold or otherwise disposed of, then theparticular shares of stock or securities, the lossform the sale or other disposition of which is notdeductible, shall be determined under rules andregulations prescribed by the Secretary of
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Finance, upon recommendation of theCommissioner.c. If the amount of stock or securities
acquired (or covered by the contract or option toacquire which) resulted in the non-deductibility ofthe loss, shall be determined under rules andregulations prescribed by the Secretary ofFinance, upon recommendation of theCommissioner.
Wagering Losses. - Losses from wagering
transactions shall be allowed only to the extent of the
gains from such transactions.
Abandonment Losses.
a. In the event a contract area where petroleumoperations are undertaken is partially or whollyabandoned, all accumulated exploration anddevelopment expenditures pertaining theretoshall be allowed as a deduction: the accumulatedexpenditures incurred in that area prior to January1, 1979 shall be allowed as a deduction only fromany income derived from the same contract area.
b. In case a producing well is subsequentlyabandoned, the unamortized costs thereof, aswell as the undepreciated costs of equipmentdirectly used therein , shall be allowed as adeduction in the year such well, equipment orfacility is abandoned by the contractor: if suchabandoned well is reentered and production isresumed, or if such equipment or facility isrestored into service, the said costs shall be
included as part of gross income in the year ofresumption or restoration and shall be amortizedor depreciated, as the case may be.
h. Bad Debts. Debts due to the taxpayer actuallyascertained to be worthless and charged off within thetaxable year except those not connected withprofession, trade or business and those sustained in atransaction entered into between related parties.
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i. Depreciation. A taxpayer shall be alloweddepreciation as a deduction for reasonable allowancefor the exhaustion, wear and tear (includingreasonable allowance for obsolescence) of propertyused in the trade or business.
Certain Methods use in computing reasonableallowance of depreciation.
a. The straight-line method;b. Declining-balance methodc. The sum-of-the-years-digit method;d. Any other method which may be prescribed by
the Secretary of Finance upon recommendation ofthe Commissioner.
j. Charitable and Other Contributions. Contributionsor gifts actually paid or made within the taxable yearto, or for the use of the Government of the Philippinesor any of its agencies or any political subdivisionthereof exclusively for public purposes, or toaccredited domestic corporation or associationsorganized and operated exclusively for religious,charitable, scientific, youth and sports development,cultural or educational purposes or for the
rehabilitation of veterans, or to social welfareinstitutions, or to non-government organizations, inaccordance with rules and regulations promulgated bythe Secretary of finance, upon recommendation of theCommissioner, no part of the net income of whichinures to the benefit of any private stockholder orindividual in an amount not in excess of ten percent(10%) in the case of an individual, and five percent (5%) in the case of a corporation, of the taxpayer'staxable income derived from trade, business orprofession.
Valuation. The amount of any charitable contribution of property
other than money shall be based on the acquisition cost of said
property.
Proof of Deductions. Contributions or gifts shall be allowable as
deductions only if verified under the rules and regulations
prescribed by the Secretary of Finance, upon recommendation of
the Commissioner.
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l. Research and Development A taxpayer may treat research
or development expenditures which are paid or incurred by him
during the taxable year in connection with his trade, business or
profession as ordinary and necessary expenses which are not
chargeable to capital account. The expenditures so treated shall be
allowed as deduction during the taxable year when paid or
incurred.
It shall not apply to:
a. Any expenditure for the acquisition or improvement ofland, or for the improvement of property to be used inconnection with research and development of acharacter which is subject to depreciation anddepletion; and
b. Any expenditure paid or incurred for the purpose ofascertaining the existence, location, extent, or qualityof any deposit of ore or other mineral, including oil orgas.
j. Pension Trusts. An employer establishing or maintaining a
pension trust to provide for the payment of reasonable pensions to
his employees shall be allowed as a deduction (in addition to the
contributions to such trust during the taxable year to cover the
pension liability accruing during the year, allowed as a deduction a
reasonable amount transferred or paid into such trust during the
taxable year in excess of such contributions, but only if such
amount (1) has not been allowed as a deduction, and (2) is
apportioned in equal parts over a period of ten (10) consecutive
years beginning with the year in which the transfer or payment is
made.
k. Optional Standard Deduction (OSD). - In lieu of the expensesallowed as deduction in computing taxable for individual and
corporate taxpayers, the taxpayer may opt to use Optional
Standard Deduction at a rate of forty percent (40%). For individual
taxpayers, the basis in computing the OSD shall be the gross
revenue or receipts for the taxable year. For corporate taxpayer,
the optional standard deduction is based on the gross income.
OSD shall be allowed to:
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a. Individual Taxpayer
1. Resident Citizen2. Non-resident Citizen3. Resident Alien4. Taxable Estate or Trust
b. Corporate Taxpayer
1. Domestic Corporation2. Resident Foreign Corporation
Special Zones and Areas
To attract foreign investments in the Philippines, the governmentcreated ECOZONES or Special Economic Zones (SEZ). TheseECOZONES or SEZ are established in selected areas with highlydeveloped or which have the potential to be developed into agro-industrial, Industrial tourist/recreational, commercial, banking,investment and financial centers. An ECOZONE may contain any orall of the following: Industrial Estates (IEs), Export Processing Zones(EPZs), Free Trade Zones, and Tourist/Recreational Centers. Entitiesregistered with Economic Zones shall be entitled to certain benefits.
Activities Eligible for PEZA Registration and Incentives
1. Export Manufacturing - manufacturing, assembly or
processing activity resulting in the exportation of at least
70% of production
2. IT (Information Technology) Service Export - IT
service activities, of which 70% of total revenues is derived
from clients abroad
3. Tourism establishment and operation within PEZA
Tourism Special Economic Zones of sports and recreation
centers, accommodation, convention, and cultural facilities
and their special interest attraction activities /
establishments, with foreign tourists as primary clientele
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4. Medical Tourism medical health services, endorsed
by the Department of Health, with foreign as primary
clientele
5. Agro-industrial Export Manufacturing processing
and or manufacturing of agricultural products resulting in
the exportation of its production
6. Agro-industrial Bio-Fuel Manufacturing
specialized manufacturing of agricultural crops and
eventual commercial processing which shall result in the
production of clean energy such as bio-fuels and the like
7. Logistics and Warehousing Services - (a) operation
of a warehouse facility for the storage, deposit,
safekeeping of goods for PEZA-registered Economic Zone
Export Manufacturing Enterprises, and or (b) importation or
local sourcing of raw materials, semi-finished goods for
resale to - or for packing / covering (including marking /
labeling) cutting or altering to customers specification,
mounting and/ or packaging into kits or marketable lots
for subsequent sale to - PEZA-registered ExportManufacturing Enterprises for use in their export
manufacturing activities, or for direct export, or for
consignment to PEZA-registered Export Manufacturing
Enterprises and eventual export.
8. Economic Zone Development and Operation:
a. Manufacturing Economic Zone Development /
Operation - development, operation and maintenance of
an economic zone for export manufacturing enterprises,
inclusive of the required infrastructure, facilities and
utilities such as light and power system, water supply and
distribution system, sewerage and drainage system,
pollution control devices, communication facilities, paved
road network, administration building.
b. IT Park Development / Operation development,
operation and maintenance of an area as a complex
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capable of providing infrastructures and other support
facilities required by IT Enterprises, as well as amenities
required by professionals and workers involved in IT
Enterprise, or easy access to such amenities.
c. Tourism Economic Zone Development / Operation
development, operation and maintenance of an
integrated resort complex, with prescribed carrying
capacities of tourist facilities and activities, such as but not
limited to, sports and recreation centers, accommodations,
convention and cultural facilities, food and beverage
outlets, commercial establishments and other special
interest and attraction activities / establishments, andprovided with roads, water supply facilities, power
distribution facilities, drainage and sewage systems and
other necessary infrastructure and public utilities.
d. Medical Tourism Economic Zone Development /
Operation development, operation and maintenance of
a Medical Tourism Park or Medical Tourism Center which
are planned and designed in accordance with the
standards of the Department of Health and the
Department of Tourism to have support facilities and
services required for health and wellness, and provided
with required infrastructure facilities and utilities.
e. Agro-Industrial Economic Zone Development /
Operation development operation and maintenance of
an agro-industrial economic zone planned and designed to
have support facilities and services required for processing
and agro-based manufacturing facilities, and provided with
the required infrastructure facilities and utilities.
f. Retirement Economic Zone Development
/Operation development. Operation, and maintenance
of a Retirement Economic Zone Park or Center, planned
and designed in accordance with the accreditation
standards of the Philippine Retirement Authority, and
provided with the required infrastructure facilities and
utilities.
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9. Facilities Providers:
a. Facilities for Manufacturing Enterprises -construction as owner /operator of factory buildings inside
a PEZA Special Economic Zone for lease to PEZA-registered
Export Manufacturing Enterprises.
b. Facilities for IT Enterprises construction as
owner/operator of buildings and other facilities inside IT
Parks which are leased to PEZA-registered IT Enterprises.
c. Retirement Facilities establishment, operation and
management of retirement facilities and other related
activities, with foreign retirees as primary clientele, duly
endorsed by the Philippine Retirement Authority, and
located in a Retirement Economic Zone.
10. Utilities establishment, operation and maintenance
of light and power systems, water supply and distribution
systems inside Special Economic Zones.
Fiscal Incentives to PEZA-Registered Economic
Zone Enterprises
1. Economic Zone Export Manufacturing Enterprise
Income Tax Holiday (ITH) 100% exemption fromcorporate income tax
o 4 years ITH for Non-pioneer Project
o 6 years ITH for Pioneer Project
ITH Extension years may be granted if the project complies with the
following criteria, (one criterion is equivalent to one ITH extension
year), provided that the total ITH entitlement period shall not
exceed eight (8) years:
a. The average net foreign exchange earnings of the project for the
first three (3) years of operations is at least US$500,000.00 and,
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b. The capital equipment to labor ratio of the project does not
exceed US$10,000.00 to 1 for the year immediately preceding the
ITH extension year being applied for.
c. The average cost of indigenous raw materials used in the
manufacture of the registered product is at least fifty per cent
(50%) of the total cost of raw materials for the preceding years prior
to the ITH extension year.
o 3 years ITH for Expansion project (ITH applies to incremental
sales)
Upon expiry of the Income Tax Holiday - 5% Special Tax onGross Income and exemption from all national and localtaxes
Tax and duty free importation of raw materials, capitalequipment, machineries and spare parts.
Exemption from wharfage dues and export tax, impost orfees
VAT zero-rating of local purchases subject to compliancewith BIR and PEZA requirements
Exemption from payment of any and all local governmentimposts, fees, licenses or taxes. However, while underIncome Tax Holiday, no exemption from real estate tax,but machineries installed and operated in the economiczone for manufacturing, processing or for industrialpurposes shall be exempt from real estate taxes for thefirst three (3) years of operation of such machineries.Production equipment not attached to real estate shall beexempt from real property taxes
Exemption from expanded withholding tax
2.Information Technology Enterprise:
Income Tax Holiday (ITH) 100% exemption fromcorporate income tax:
o 4 years ITH for Non-pioneer project
o 6 years ITH for Pioneer project
ITH Extension year may be granted if Project complies with the
following criteria (one criterion is equivalent to one ITH extension
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year), provided that the total ITH entitlement period shall not
exceed eight (8) years:
> The average net foreign exchange earnings of the project for the
first three (3) years of operations is at least US$500,000.00 and,
> The capital equipment to labor ratio of the project does not
exceed US$10,000.00 to 1 for the year immediately preceding the
ITH extension year being applied for.
o 3 years ITH for Expansion project (ITH applies to incremental
sales)
Upon expiry of the Income Tax Holiday - 5% Special Tax onGross Income and exemption from all national and localtaxes. Tax and duty free importation of equipment andparts.
Exemption from wharfage dues on import shipments ofequipment.
VAT zero-rating of local purchases of goods and services,including land-based telecommunications, electrical power,
water bills, and lease on the building, subject tocompliance with Bureau of Internal Revenues and PEZArequirements
Exemption from payment of any and all local governmentimposts, fees, licenses or taxes. However, while underIncome Tax Holiday, no exemption from real estate tax,but machineries installed and operated in the economiczone for manufacturing, processing or for industrialpurposes shall not be subject to payment of real estatetaxes for the first three (3) years of operation of suchmachineries. Production equipment not attached to the
real estate shall be exempt from real property taxes. Exemption from expanded withholding tax.
3. Tourism Economic Zone Locator Enterprise
Four (4) years of Income Tax Holiday ITH (as qualifiedunder the National Investment Priorities Plan)
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Upon expiry of the Income Tax Holiday - 5% Special Tax onGross Income and exemption from all national and localtaxes
Tax and duty-free importation of capital equipment
VAT Zero Rating on local purchases of goods and services,including land-based telecommunications, electric power,and water bills
Exemption from expanded withholding tax
4. Medical Tourism Enterprise
Four (4) years of Income Tax Holiday on income solelyfrom servicing foreign patients
Upon expiry of the Income Tax Holiday - 5% Special tax onGross Income upon in lieu of all national and local taxes
Tax and duty-free importation of medical equipment,including spare parts and equipment supplies, required forthe technical viability and operation of the registeredactivity/ies of the enterprise
VAT Zero Rating on local purchases of goods and services,including land-based telecommunications, electric power,and water bills
Exemption from expanded withholding tax
5. Agro-Industrial Economic Zone Enterprise
Four (4) years of Income Tax Holiday
Upon expiry of the Income Tax Holiday - 5% Special tax onGross Income and exemption from all national and local
taxes. Tax and duty free importation of production equipment
and machineries, breeding stocks, farm implementsincluding spare parts and supplies of the equipment andmachineries
Exemption from export taxes, wharfage dues, impost andfees
VAT Zero Rating on local purchases of goods and services,including land-based telecommunications, electric power,and water bills
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Exemption from payment of local government fees such asMayors Permit, Business Permit, permit on the Exercise ofprofession/Occupation/Calling, Health Certificate Fee,Sanitary Inspection Fee, and Garbage Fee
6. Economic Zone Logistics Services Enterprise
Exemption from duties and taxes on raw materials, semi-finished goods for re-sale to - or for packing/covering,cutting, altering for subsequent sale to PEZA-registeredExport Manufacturing Enterprises, for direct export or forconsignment to PEZA-registered export enterprise.
VAT Zero Rating on raw materials for checking, packing,
visual inspection, storage and shipping to be sourcedlocally.
7. Economic Zone Developer / Operator
a. Manufacturing Economic Zone Developer / Operator
Special 5% Tax on Gross Income and exemption from allnational and local taxes, except real property tax on land
owned by the Economic Zone Developer. VAT Zero rating of local purchases
Exemption from expanded withholding tax
b. IT Park Developer / Operator
Special 5% Tax on Gross Income and exemption from allnational and local taxes, except real property tax on landowned by the IT Park Developer
VAT Zero rating of local purchases
Exemption from expanded withholding tax
c. Tourism Economic Zone Developer / Operator
Special 5% Tax on Gross Income and exemption from allnational and local taxes, except real property tax on landowned by the Tourism Economic Zone Developer
VAT Zero rating of local purchases
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Exemption from expanded withholding tax
d. Medical Tourism Economic Zone Developer / Operator
Special 5% Tax on Gross Income and exemption from allnational and local taxes, except real property tax on landowned by Medical Tourism Zone Developer
VAT Zero rating of local purchases
Exemption from expanded withholding tax
e. Agro-Industrial Economic Zone Developer / Operator
Special 5% Tax on Gross Income and exemption from allnational and local taxes, except real property tax on landowned by the Agro-Industrial Economic Zone Developer
VAT Zero rating of local purchases
Exemption from expanded withholding tax
f. Retirement Economic Zone Developer / Operator
Special 5% Tax on Gross Income and exemption from allnational and local taxes, except real property tax on landowned by the Retirement Economic Zone Developer
VAT Zero rating of local purchases
Exemption from expanded withholding tax
8. Facilities Enterprises
a. Economic Zone Facilities Enterprise
Special 5% Tax on Gross Income and exemption from allnational and local taxes, except real property tax on landowned by developers
VAT Zero rating of local purchases
Exemption from expanded withholding tax
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b. IT Park Facilities Enterprise
Special 5% Tax on Gross Income and exemption from allnational and local taxes, except real property tax on landowned by developers
VAT Zero rating of local purchases
Exemption from expanded withholding tax
c. Retirement Economic Zone Facilities Enterprise
Special 5% Tax on Gross Income and exemption from allnational and local taxes, except real property tax on landowned by developers.
VAT Zero rating of local purchases
Exemption from expanded withholding tax
9. Economic Zone Utilities Enterprise
Special 5% Tax on Gross Income and exemption from allnational and local taxes, except real property tax on landowned by developers.
VAT Zero rating of local purchases
Exemption from expanded withholding tax
WITHHOLDING TAXES
Compensation
Withholding tax on compensation is imposed on the salaries, wages
and other taxable benefits received as remuneration for the
services rendered by employees for his employer under employer-
employee relationship. The employer is required to deduct the
applicable taxes on the income received by the employee and remit
the same with the BIR.
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Employees receiving purely compensation income of Minimum
Wage Earners (MWE) who work in private sector and being paid the
Statutory Minimum Wage (SMW) as fixed by the Regional Wage
Tripartite and Productivity Board (RWTPB) and National Wages and
Productivity Commission (NWPC) applicable to the place where they
are assigned shall be exempted from income tax. Holiday pay,
overtime pay, night shift differential pay and hazard pay received
by MWE is also exempted from income tax.
MWE receiving other income, such as income from conduct of trade
and business, practice or profession, except income subject to final
tax, are not exempted from income tax on their entire income
earned during the taxable year.
The following income payments are exempted from the
requirement of withholding tax on compensation:
1. Remuneration received as an incident of employment, asfollows:
a. Retirement benefits received under Republic Act
under 7641 and those received by officials andemployees of private firm, whether individual orcorporate, under a reasonable benefit planmaintained by the employer which meet thefollowing requirements:
i. The plan must be reasonable;ii. The benefit plan must be approved
by the Bureau;
iii. The retiring official or employee musthave been in the service of the sameemployer for at least ten (10) years and
is not less than fifty (50) years of age atthe time of retirement; andiv. The retiring official or employee should
not have previously availed of theprivilege under the retirement benefitplan of the same or another employer.
b. Any amount received by an official or employee orby his heir from the employer due to death,sickness or other physical disability of for anycause beyond the control of the said official or
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employee, such as retrenchment, redundancy, orcessation of business.
c. Social security benefits, retirement gratuities,
pensions and other similar benefits received byresident or non-resident citizens of the Philippinesor aliens who come to reside permanently in thePhilippines from foreign government agencies andother institutions private or public.
d. Payments of benefits due or to become due toany person residing in the Philippines under thelaw of United States administered by the UnitedStates Veterans Administrations.
e. Payments of benefits made under the socialSecurity Systems Act of 1954 as amended.
f. Benefits received from GSIS Act of 1937 asamended, and the retirement gratuity received bygovernment officials and employees.
2. Remuneration paid for agriculture3. Remuneration for domestic services4. Remuneration for casual labor not in the course of an
employers trade or business
5. Compensation for services received by a citizen or residentof the Philippines for a foreign government or aninternational organization
6. Damages7. Life Insurance
8. Amount received by the insured as a return of premium9. Compensation for injuries or sickness10. Income exempt under treaty
11. Thirteenth (13th) month pay and other benefits notexceeding Php 30,000
12.GSIS, SSS, Medicare and Other contributions
De Minimis Benefits
De minimis benefits is a privilege of relatively of small value that
are offered or furnished by the employers to its employees merely
as means of promoting the health, goodwill, contentment or
efficiency of the his employees that will not be considered as
compensation subject to withholding tax both managerial and rank
and file employees, such as follows:
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1. Monetized unused vacation leave credits of employees notexceeding ten (10) days during the year and themonetized value of leave credits paid to governmentofficials and employees;
2. Medical cash allowance to dependents of employees notexceeding P 750.00 per employee per semester or P125.00 per month;
3. Rice subsidy of P 1,500.00 or one (1) sack of 50kg. rice permonth amounting to not more than P 1,500.00;
4. Uniform and clothing allowance not exceeding P 4,000.00per annum;
5. Actual yearly medical benefits not exceeding P 10,000.00
per annum;6. Laundry allowance not exceeding P 300.00 per month;7. Employee achievement awards which must be in form of
tangible personal property other than cash or giftcertificate, with annual monetary value not exceeding P10,000.00 received by the employee under an establishedplan which does not discriminate in favor of highly paidemployees;
8. Gifts given during Christmas and major anniversarycelebrations not exceeding P 5,000.00 per employee perannum;
9. Flower, fruits, books, or similar items given to employeesunder special circumstances; and
10. Daily meal allowance for overtime work not exceedingtwenty five percent (25%) of his basic minimum wage.
The amount of de minimis benefits within the limit shall not
be considered in determining the P 30,000.00 ceiling of other
benefits excluded from gross income. Any excess of the de
minimis benefits over their respective ceilings shall be
considered part of the other benefits and the employeereceiving it will be subject to tax only on the excess amount
over P 30.000.00
EXPANDED WITHHOLDING TAX
There are certain types of income payment made by taxpayer that
are subject to expanded withholding tax. Failure to deduct and
remit the said tax will result to disallowance of the said expenses in
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computing the taxable income of the taxpayers. The taxpayer is
required to withhold these taxes and remit the same with the BIR at
the time it was paid or becomes payable, whichever comes first.
Types of Income payment and its applicable tax rates:
Income Payment Applicable Tax Rates
Professional and talents fees paid to
juridical person (lawyers, CPAs,
engineer, etc) except payment to
General Professional Partnership,
management and technicalconsultants, business and
bookkeeping agent and agencies,
fees of director who are not
employee of the company
If the current years gross
income does not exceed 720,000
10%
If the current years grossincome exceed 720,000
15%
Rentals 5%
Prime contractors/sub-contractors 2%
Gross commission or service fees ofcustoms, insurance, stocks, real
estate, immigration and commercial
brokers and fees of agents of
professional entertainers
10%
Income payment made by to 20,000
corporation
Supplier of goods
1%
Supplier of services
2%
Income payment made by top 5,000
individual taxpayer
Supplier of goods
1%
Supplier of services
2%
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Commission, rebates, discounts and
other similar considerations paid and
granted to independent and
exclusive distributors,
medical/technical and sales
representative and marketing agents
and sub-agents of multi-level
marketing companies
10%
Exemption from Expanded Withholding Tax
a. National government and its instrumentalities, includingprovincial, city or municipal government.
b. Persons enjoying tax exemption from payment of incometaxes pursuant to the provision of any law.
FRINGE BENEFIT TAX
Fringe Benefit or any goods, service, or other benefit furnished or
granted by the employer in cash or in kind, in addition to basic
salaries to managerial or supervisory employees and not rank and
file employee such as but not limited to the following;
a. Housingb. Expense Accountc. Vehicle of any kindd. Household Personnel
e. Interest on loan at less than market rate to the extent ofthe difference between the market rate and actual rategranted
f. Membership fees, dues and other expense borne by theemployer for the employee in social and athletic clubs orother similar organizations
g. Expense for foreign travelh. Holiday and vacation expenses
i. Education assistance to the employee of his dependents
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j. Life or health insurance and other non-life insurancepremium or similar amounts in excess of what the lawallows
The Fringe Benefit Tax shall be thirty two percent (32%) of the
gross-up monetary of the benefits received. The gross-up monetary
value shall be computed by dividing the monetary value of the
fringe benefit by sixty eight percent (68%).
If the fringe benefit is received by a non-resident alien individual
who is not engaged in trade or business in the Philippines, a fringe
benefit tax of twenty five percent (25%) shall be imposed on the
grossed-up monetary value of the fringe benefit. In computing forthe grossed-up monetary value, the monetary value of the fringe
benefit shall be divided by seventy five percent (75%).
In the fringe benefit is received by an alien individual employed by
regional or area headquarters of a multinational company or by
regional operating headquarters of a multinational company, or by
an alien employed by offshore banking unit of a foreign bank
established in the Philippines, or by an alien individual employed by
a service contractor or by a foreign service subcontractor engagedin petroleum operations in the Philippines and any of their Filipino
individual employees who are employed and occupying the same
position shall be subject to fifteen percent (15%) of the gross-up
monetary value. The said tax base shall be computed by dividing
the monetary value of the fringe benefit by (85%).
For employees in special economic zones, it shall be covered by the
normal rate of fringe benefit tax or the special rate of twenty five
percent (25%) or fifteen percent (15%).
BUSINESS TAX
VALUE ADDED TAX
Value Added Tax (VAT). The VAT is an indirect tax and the amount
of tax may be shifted or passed on to the buyer, transferee or
lessee of the goods, properties, or services. Twelve percent (12%)
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of the gross selling price or gross value in money is usually levied to
the goods or properties sold, bartered or exchanged.
A taxpayer shall be required to be registered as VAT taxpayer if its
sale or receipts with in the year or previous year exceed P
1,500,000.00 or a taxpayer opted to be a VAT taxpayer even if its
sales or receipt did not exceed P 1,500,000.00.
Zero-Rated Sale of Goods, properties or services is a taxable
transaction for VAT purposes, but shall not result in any output tax.
However, the input tax on purchase of goods, properties or
services, related to such zero-rated sale, shall be available as tax
credit or refund which should be applied within two (2) years afterthe close of the taxable quarter when such sales were made.
Sale of Goods subject to zero percent (0%) rate:
a. Export sales
1. The sale and actual shipment of goodsfrom the Philippines to a foreign country paid
for in foreign currency or its equivalent ingoods or services, and accounted for with therules and regulations of Bangko Sentral ngPilipinas (BSP);
2. The sale of raw material or packagingmaterial to a non-resident buyer for deliveryto a resident local export-oriented enterpriseto be used in manufacturing, processing,packing or repacking in the Philippines of thesaid buyers goods;
3. The sale of raw material or packagingmaterials to an export-oriented enterprisewhose export sales exceeds seventy percent(70%) of total annual production;4. Sale of gold to BSP;
5. Transactions considered export salesunder Executive Order No. 226, otherwiseknown a s Omnibus Investments Code of1987, and under special laws; and6. The sale of goods, supplies, equipmentand fuel to persons engaged in international
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shipping or international air transportoperations.
b. Foreign Currency Denominated Sale to a non-resident of goods, as