The National Internal Revenue Code (NIRC) serves as the governing law for Philippine taxation. It took effect on January 1, 1998, and is administered by the Bureau of Internal Revenue (BIR). The BIR Commissioner has exclusive jurisdiction to interpret the provisions of the code and other tax laws, decide disputed assessments, grant refunds of taxes, fees, and other charges, and abate or cancel tax liabilities.

If a taxpayer is unsatisfied with the decision, ruling, or findings of the BIR Commissioner, they can appeal directly to the Court of Tax Appeals.

Primary Types of Taxation

A. Individual Income Tax

Residents engaged in trade or business are taxed on their net income (gross income less allowable deductions and personal exemptions) according to a schedule of rates:

• Up to ₱250,000: 0%
• Over ₱250,000 up to ₱400,000: 20% of the excess over ₱250,000
• Over ₱400,000 up to ₱800,000: ₱30,000 + 25% of the excess over ₱400,000
• Over ₱800,000 up to ₱2,000,000: ₱130,000 + 30% of the excess over ₱800,000
• Over ₱2,000,000 up to ₱8,000,000: ₱490,000 + 32% of the excess over ₱2,000,000
• Over ₱8,000,000: ₱2,410,000 + 35% of the excess over ₱8,000,000

Personal exemptions have been removed under the TRAIN Law, which took effect on January 1, 2018.

B. Passive Income

1. Interest Income

   A final tax of 20% is imposed on interest income, which is withheld at the source. Exceptions include:

   • Interest income from a depositary bank under the Foreign Currency Deposit Unit (FCDU) is subject to a final tax rate of 15%.
   • Philippine long-term investments (over five years) are exempt from tax.

2. Dividends

   A final tax of 10% is imposed on cash or property dividends from domestic corporations, joint stock companies, insurance or mutual funds, or regional operating headquarters of multinational corporations.

3. Capital Gains

   • A final tax of 15% is imposed on net capital gains from the sale of shares of stock not traded through the stock exchange.
   • For shares listed and traded through the stock exchange, a stock transaction tax of 0.6% of the gross selling price is imposed.

4. Fringe Benefits

   Fringe benefits given to employees are subject to a final fringe benefits tax of 35% of the grossed-up monetary value, payable by the employer.

C. Corporation Tax

Resident foreign corporations engaged in trade or business in the Philippines are taxed at the same rates as domestic corporations. The corporate income tax rate is currently 30%. However, under the CREATE Law (effective January 1, 2021), the tax rate has been reduced to 25% for large corporations and 20% for small and medium-sized enterprises (SMEs).

The Minimum Corporate Income Tax (MCIT) is 1% of the gross income for the period July 1, 2020, to June 30, 2023, and will revert to 2% thereafter.

Primary Tax Incentives

A. Tax Holiday

The Omnibus Investments Code grants tax holidays to enterprises that register with the Board of Investments (BOI) and qualify under the annual Investment Priority Plan. These enterprises are entitled to tax holidays of either four or six years, and they may receive tax credits for purchasing Philippine-made capital equipment and raw materials.

B. Special Economic Zones

There are over thirty special economic zones throughout the Philippines, where export manufacturing firms are encouraged to start operations. Under the Philippine Economic Zone Authority (PEZA) Law, a special economic zone registered enterprise can pay a tax of 5% of its gross income, in lieu of all other national and local taxes.

A firm that has registered under the Omnibus Investments Code and is located within a special economic zone can enjoy a tax holiday for the first four or six years of its operations, followed by a 5% tax thereafter. The exemption from national taxes covers all internal revenue taxes, including the Value-Added Tax (VAT).