taxes in the philippines l Moneymax

Did you know that the Philippines has one of the highest tax rates in Southeast Asia?[1] That’s right. Our tax system is one of the least friendly to taxpayers in the region. But don’t let this fact discourage you from paying the right amount of taxes. 

Tax in the Philippines is quite a complicated matter. But you don’t have to be a CPA or a 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 them, and where they go. Educate yourself today. Here are the basics of taxes in the Philippines.

What are Taxes in the Philippines?

Taxes in the Philippines - What are Taxes?

Tax is a fee that people and entities need to pay to the government to fund various social services and infrastructure 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[2] that took effect in 2018.

The Importance of Taxes in the Philippines

The Philippine government relies heavily on tax revenue to fund its operations and finance its development projects. So taxation is a critical part of the country’s economic and fiscal policy. 

Aside from the revenue that taxes generate, they also help promote economic stability and growth. By imposing taxes on certain goods and services, the government can discourage their unnecessary consumption and production and ensure that resources are used more efficiently. 

The Philippines uses taxes to redistribute income and wealth in the society. Progressive taxation systems, for instance, tax higher incomes at higher rates to reduce inequality. 

Similarly, taxes on luxury goods or “sin” products like tobacco and alcohol help raise revenue while also discouraging their consumption. 

Why Do We Need to Pay Taxes in the Philippines?

You’ve probably asked yourself this question countless of times in the past. Especially when it’s time to part with the money that you worked so hard for to pay your taxes. But here’s why you need to pay your taxes.

1. Contribute to the Country’s Development

Taxes in the Philippines - Why Do We Need to Pay Taxes?
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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 to travel, study, do business, and get healthcare services more efficiently.

Taxes also 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 personal 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.

3. Avoid Tax Evasion

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

What are the Types of Taxes in the Philippines?

Taxes in the Philippines - Types of Taxes in the Philippines

There are three general classifications of taxes in the Philippines: national, local, and special taxes.

1. National Taxes

National taxes in the Philippines[3] 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[4] 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 ₱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

2. Local Taxes

Local taxes in the Philippines[5] 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 – ₱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 ₱50,000 in cities or up to ₱30,000 in municipalities
  • Community tax – Tax imposed on individuals and corporations within the jurisdiction of a city or municipality

3. Special Taxes

In addition to national taxes and local taxes, there are special taxes[6] 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?

Taxes in the Philippines - Who Pays Taxes?

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 non-resident citizens with income from sources within the Philippines
  • Resident and non-resident 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
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What is a Tax Exemption?

A tax exemption in the Philippines is an exclusion from the payment of taxes on certain types of income, property, or transactions. Tax exemptions are typically granted to individuals, businesses, or organizations that meet certain requirements specified by the law. 

This means that if you qualify for an exemption, then you pay zero tax. Individuals, entities, and organizations can get a Certificate of Tax Exemption as long as they meet the requirements. 

Who is Exempted from Taxes?

Under the TRAIN Law signed in 2018, there are exemptions for paying taxes. Self-employed and professional taxpayers (SEPS) whose annual taxable income is ₱250,000 or below are exempted from paying Personal Income Tax (PIT).

Filipino immigrants or residents in other countries whose source of earnings is outside of the Philippines are also exempted, including land-based and sea-based Overseas Filipino Workers. 

Minimum wage earners from both public and private sectors are also exempted from paying income taxes, including their holiday pay, hazard pay, overtime pay, and night-shift differential.

Employees whose 13th-month pay, separation fees, and other benefits amounting to ₱90,000 are also exempted. 

What’s a Certificate of Tax Exemption?

A certificate of tax exemption is a document that proves that an individual or organization is exempt from paying taxes. You can usually get this document from the BIR.  

In the Philippines, you can get income tax, value-added tax, and excise tax exemptions.  The most common type of exemption is the income tax exemption, granted to specific individuals and organizations that meet the Bureau of Internal Revenue (BIR) requirements. 

Organizations eligible for income tax exemption include religious groups, charitable institutions, educational institutions, and non-profit organizations. 

Individuals eligible for this exemption include senior citizens, persons with disabilities, scholars, employees in job/livelihood programs, and certain government employees. 

To apply for a certificate of tax exemption, the individual or organization must submit the necessary documents to the BIR, specifically to the Revenue District Office (RDO).

Can I Apply for a Certificate of Tax Exemption Online?

While the BIR allows taxpayers to make transactions online, such as filing and payment of income taxes, applying for a certificate of tax exemption should be done at the taxpayer’s RDO. 

What Expenses are Exempted from Tax Computation and Payment?

taxes in the philippines - Allowable Deductible Expenses

Allowable Deductible Expenses

Did you know that you can lower your income tax legally? This is why allowable deductible expenses exist. For employed professionals and self-employed individuals, you can have a lower income tax if you have more expenses. However, the BIR has rules regarding allowable deductible expenses before you can make a claim.  

Here are some of the things you should know:

  • The expenses must be related to your profession or business. Your personal expenses aren’t deductible. 
  • You need to have supporting documents that the expenses are for professional services or business. You can use sales invoices, official receipts, and others. 
  • Kickbacks and bribes aren’t deductible.

Some of the allowable deductible expenses include:

  • Charitable contributions – 100% deductible if the donations are for BIR-accredited donee.
  • Fuel and oil – As long as they aren’t personal expenses
  • Communication, light, and water 
  • Office supplies 
  • Repairs and maintenance – labor, materials, and supplies

Tax Travel Exemption

taxes in the philippines - travel tax exemption

If you’re traveling, you should know by now that there are also exemptions on travel taxes. That is if you’re a qualified exempt passenger of TIEZA.

A travel tax exemption[7] is a special privilege granted to certain individuals by the Philippine government. This privilege allows these individuals to be exempt from paying the travel tax whenever they leave the country.

The travel tax exemption is typically granted to Philippine citizens who are working abroad, as well as to certain foreign nationals who have been designated by the Philippine government as official representatives of their respective governments.

Who Can Avail Travel Tax Exemption?

Overseas Filipino Workers, Filipinos residing overseas for less than a year, and infants (2 years old and below) are exempt from paying travel taxes. 

There are also individuals who are qualified to apply for a certificate of travel tax exemption, such as foreign diplomatic and consular officials,  crew members of airlines flying internationally, government officials, and employees who are traveling for business purposes, among others. 

They can apply for the Travel Exemption Certificate on the Tourism Infrastructure and Enterprise Zone Authority (TIEZA) website and submit the required documents online for faster processing. 

Final Thoughts

It’s important to pay taxes not just because you have to, but because your taxes help contribute to the country’s development. Being a responsible citizen of this country, it’s both your right and responsibility to learn and understand the basics of taxes in the Philippines and how to pay them right. After all, it’s your hard-earned money that we’re talking about.

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