Know Your Taxes: Basics of Tax in the Philippines

Published: March 3, 2020 | Updated: October 29, 2020 | Posted by: Venus Zoleta | Personal Finance

Tax in the Philippines | Moneymax

Tax in the Philippines is quite a complicated matter. But you don’t have to be a CPA or math whiz to know what it entails. Apart from filing and paying taxes, it’s also important to know what taxes you must pay, why you have to pay taxes, and where your taxes go.

Don’t be confused. Inform yourself today. Here are the basics of tax in the Philippines for beginners.

What is Tax in the Philippines?

Tax in the Philippines - What are Taxes?

Tax is a fee that people and entities are required to pay to the government to fund various social services and infrastructures that are crucial for nation-building and economic growth.

In the Philippines, the National Internal Revenue Code states the rules on taxation. Also known as the Tax Code, it identifies who should pay taxes and the types of taxes that should be collected from taxpayers.

The Philippine tax law has undergone several reforms, the most recent of which is the Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Act[1] that took effect starting in 2018.

Read more: 5 Reasons Why the Tax Reform Law is Good for Us

What are the Types of Taxes?

Tax in the Philippines - Types of Taxes in the Philippines

Tax in the Philippines is divided into three general classifications: national, local, and special taxes.

1. National Taxes

National taxes[2] are fees that the Bureau of Internal Revenue (BIR) collects from taxpayers all over the Philippines.

Here are the national taxes imposed on different incomes and transactions in the Philippines:

  • Capital gains tax – Tax on profits from selling an asset (property, jewelry, stocks, etc.) in the Philippines
  • Documentary stamp tax (DST) – Tax on documents, loan contracts, and papers that serve as proof of sale or transfer of ownership of a property
  • Donor’s tax – Tax on a gift or donation, in which both the sender and recipient are living when the gift is given
  • Estate tax – Tax paid by the legal heir before the estate[3] from a deceased person is transferred to their name
  • Excise tax – Tax on the production, sale, or consumption of goods in the Philippines
  • Income tax – Tax on a person’s or business’ income or profit
  • Percentage tax – A business tax imposed on non-VAT-registered individuals or corporations that sell or lease goods and services with gross annual sales or receipts not exceeding PHP 3 million
  • Value-added tax (VAT) – A sales tax on consumption imposed on the sale, lease, or importation of goods, properties, and services in the Philippines, which may be passed on to the consumer
  • Withholding tax – Tax withheld from an individual’s income to promote tax compliance and prevent tax evasion

Read more: Inheriting Property? Learn About Estate Tax in the Philippines First

2. Local Taxes

Local taxes[4] are involuntary fees that local government units (LGUs) collect from their constituents and use to finance activities and projects for their city or municipality.

Here are the local taxes that people and businesses pay in the Philippines:

  • Basic real property tax – Tax on the value of real properties such as houses, lands, buildings, etc.
  • Business of printing and publication tax – Tax imposed on businesses that involve printing and publication
  • Franchise tax – Tax imposed on a franchise business
  • Sand, gravel and other quarry resources tax – Tax on the fair market value of ordinary stones, sand, gravel, earth, and other quarry resources extracted from public lands or public waters within the province
  • Professional tax – Tax imposed on professionals such as lawyers, doctors, and engineers
  • Amusement tax – Tax imposed on cinemas, theaters, concert halls, circuses, and other amusement venues
  • Annual fixed tax for delivery trucks and vans – PHP 500 fee for every truck or van used to deliver soft drinks, liquors, or cigarettes within the province
  • Local business tax – Tax imposed by municipalities on different types of businesses within their jurisdiction
  • Barangay tax – Tax imposed on stores or retailers with annual gross sales of up to PHP 50,000 in cities or up to PHP 30,000 in municipalities
  • Community tax – Tax imposed on individuals and corporations within a city’s or municipality’s jurisdiction

In case you’re wondering, there are different convenient ways to pay BIR online.

3. Special Taxes

In addition to national taxes and local taxes, there are special taxes[5] that must be paid during certain transactions or purchases.

  • Motor Vehicle User’s Charge (MVUC) – An annual fee charged on every application for vehicle registration
  • Travel tax – An airport fee imposed on Filipino citizens, foreign residents, and non-resident foreigners (who have stayed in the country for more than a year) who are leaving the Philippines
  • Head tax – Tax imposed on foreigners staying in the Philippines for at least 60 days, with permanent residency status in the country, and applying for Re-entry Permit and paid to the immigration officer when entering the country
  • Charges on forest products – Tax on the privilege of exploiting the forest resources in the Philippines
  • Energy consumption tax – Tax on electric power consumption over 650 kWh of each residential customer

Who Pays Taxes in the Philippines?

Tax in the Philippines - Who Pays Taxes?

Taxpayer Classification in the Philippines

Under the Tax Code, the following individuals and corporations are required to pay taxes in the Philippines:

  • Filipino citizens living in the Philippines and earning income from sources within and outside the country
  • OFWs, Filipino immigrants, and other nonresident citizens with income from sources within the Philippines
  • Resident and nonresident foreigners earning income from sources within the Philippines
  • Domestic corporations earning income from sources within and outside the Philippines
  • Foreign corporations with income from sources within the Philippines

Why Do We Need to Pay Taxes in the Philippines?

Tax in the Philippines - Why Do We Need to Pay Taxes?

Photo from Build Build Build Facebook page

1. Contribute to the Country’s Development

Lofty as it may sound, paying taxes means helping in the government’s nation-building efforts. Your money goes to building roads, bridges, airports, mass transport systems, classrooms, public hospitals, and other structures that will allow Filipinos (including you and your family) to travel, study, do business, and get healthcare services more efficiently.

Taxes collected by the government are also used to finance basic social welfare services, disaster response, and other essential government services.

Salaries of public school teachers, government healthcare professionals, and other government employees also come from taxes.

Taxes fund many other public expenditures in the Philippines. But the most important thing to point out here is that you—the taxpayer—will ultimately benefit from the different government programs financially supported by the taxes you pay.

2. Secure Income Documents

For credit card and loan applications, banks and other institutions require an income tax return (ITR) that serves as the borrower’s proof of income. Having this all-important financial document raises your chance for a credit card or loan approval.

An ITR is also a requirement for visa applications. So if you plan to travel to any country that requires a visa for Filipinos, you should keep a copy of your ITR.

To get an ITR, you need to file and pay your taxes to the BIR. For employees, their employer takes care of filing and paying taxes for them. For freelancers and employers, tax filing and payment must be done on their own.

Read more: How to File an Income Tax Return in the Philippines: Guide for Freelancers and Entrepreneurs

3. Avoid Tax Evasion

Failure to pay tax in the Philippines is against the law and results in serious and costly consequences. Punishments for tax evaders include a penalty fee with annual interest on unpaid tax, imprisonment, fines, and temporary closure (for business taxpayers).

Read more: What Happens If I Don’t Pay My Taxes? Tax Evasion Penalties Every Taxpayer Must Know

Final Thoughts

Being a responsible citizen of this country, it’s both your right and responsibility to learn about taxes and how to pay them right. Part of becoming a financially independent adult is understanding the basics of tax in the Philippines. After all, it’s your hard-earned money that we’re talking about.

Compare car insurance, credit cards, and loans in an instant.