The policy of taxation in the Philippines is governed chiefly by the Constitution of the Philippines and three Republic Acts.
Constitution: Article VI, Section 28 of the Constitution states that "the rule of taxation shall be uniform and equitable" and that "Congress shall evolve a progressive system of taxation".
Taxes imposed at the national level are collected by the Bureau of Internal Revenue, while those imposed at the local level are collected by a local treasurer's office.
Individuals, including nonresident aliens, earning compensation income are taxed based only on the income tax schedule for individuals. On the other hand, self-employed individuals and professionals are taxed based on the income tax schedule for individuals, applicable percentage taxes, and value-added tax. However, if their gross sales does not exceed the VAT threshold, they have the option to be taxed either on the basis of the income tax schedule for individuals and the applicable percentage taxes, or just with a flat tax rate of 8% on their gross sales.
Interests, royalties, prizes and other winnings
Interest income from bank deposits, deposit substitutes, trust funds, and other similar products is taxed at the rate of 20%. Royalties, except on books, literary works and musical compositions, are taxed at the rate of 10%. Prizes and winnings from Philippine Charity Sweepstakes OfficeLotto in excess of P10,000 are taxed at the rate of 20%. Interest income from a depository bank under the expanded foreign currency deposit system is taxed at the rate of 15%. Income from long-term deposits and investments, when pre-terminated in less than three years after making such deposit or investment, is taxed at the rate of 20%; less than four years, 12%; and, less than five years, 5%.
Dividends
Cash and property dividends are taxed at the rate of 10%.
Capital gains from the sale of shares of stock not traded in stock exchange are taxed at the rate of 15%. Capital gains from the sale of real property are taxed at the rate of 6%, except when such proceeds would be used to construct a new principal residence within eighteen months after the sale of a previous principal residence had occurred.
The transfer of the net estate is taxed at a flat rate of 6%. There is a standard deduction amounting to P5,000,000.
Donor's tax
The total value of gifts made in a calendar year shall be taxed at a flat rate of 6%. There is a standard deduction amounting to P250,000.
Value-added tax
The value-added tax rate since 2006 is 12%. The new VAT threshold was changed from Php 1,919,500 to Php 3,000,000 as a result of the passage of the Tax Reform for Inclusion and Acceleration Law.
Exempt transactions
The following goods, services and transactions are exempted from the VAT:
agricultural and marine food products in their original state;
fertilizers, seeds, seedlings, fingerlings, and feeds and feed ingredients;
importation of personal and household effects of persons resettling in the Philippines;
agricultural cooperatives, and cooperatives that are non-agricultural and non-electric in nature;
residential lots worth at most P1,500,000, or house and lots worth at most P2,500,000
monthly lease of residential units at most P15,000;
books and mass media publications ;
transport services by non-Philippine carriers;
cargo vessels and aircraft;
financial services;
sales to senior citizens and persons with disability;
from 2019, drugs prescribed for diabetes, high cholesterol and hypertension; and,
annual sales of any other goods or services not exceeding P3,000,000.
Percentage tax
Percentage tax is a business tax imposed on persons or entities/transactions:
who sell or lease goods, properties or services in the course of trade or business and are exempt from value-added tax under Section 109 of the NationalInternal Revenue Code, as amended, whose gross annual sales and/or receipts do not exceed Php 3,000,000 and who are not VAT-registered; and,
engaged in businesses specified in Title V of the National Internal Revenue Code.
Excise taxes apply to goods manufactured or produced in the Philippines for domestic sales or consumption or for any other disposition and to things imported.
Local taxes
Real property tax
One of main sources of revenues of the local government units is the real property tax, which is a tax imposed on all types of real properties including lands, buildings, improvements, and machinery.
