Tax in the Philippines | Philippines Tax Guide - HSBC Expat (2024)

Gross income includes compensation, income from the conduct of a trade, business or profession, and other income, including gains from dealings in property, interest, rent, dividends, annuities, prizes, pensions and partners’ distributive shares.

Employment income – Employment income includes all remuneration for services performed by an employee for their employer under an employer-employee relationship. The name by which compensation is designated is immaterial. It includes salaries, wages, emoluments and honoraria, allowances, commissions, fees including director’s fees for a director who is also an employee of the firm, bonuses, fringe benefits, taxable pensions and retirement pay and other income of a similar nature. Emergency cost-of-living allowances received by employees are also included in their compensation income.

Employment income received for services provided in the Philippines is subject to tax in the Philippines regardless of where the compensation is paid. Remuneration for services remains classified as compensation even if paid after the employer-employee relationship is ended.

Taxable employment income equals employment income less exclusions. With the passage of the Tax Reform for Acceleration and Inclusion (TRAIN) Act (Republic Act [RA] No. 10963), personal and additional exemptions and premium payments on health and/or hospitalisation insurance are no longer considered as deductions from employment income of citizen and resident alien taxpayers. As a result, beginning with the 2018 tax year, these deductions may no longer be deducted from employment income to arrive at taxable employment income. Non-resident aliens not engaged in trade or business in the Philippines remain taxable on their gross income.

Business income – Gross income from the conduct of a trade or business or the exercise of a profession may be reduced by certain allowable deductions.

Professional fees paid to individuals are subject to a 10% creditable expanded withholding tax (EWT) if the individual earns gross income of more than PHP 3 million during the year or if the individual is VAT-registered, regardless of the amount of their gross income. If an individual has gross income during the year of PHP 3 million or less, the professional fees are subject to a creditable EWT of 5%.

Under certain circ*mstances, self-employed persons may carry forward business losses for three years, unless a 25% change in the ownership of the business occurs. Carry-backs are not permitted.

Directors’ fees – Directors’ fees derived by individuals who are employees of the same company are taxed as income from employment and are subject to creditable withholding tax on wages. Directors’ fees derived by individuals who are not employees of the same company are included in the recipients’ business income and are subject to a creditable withholding tax. The rate of the withholding tax is 10% if the gross income for the current year exceeds PHP 3 million. Otherwise, the rate is 5%. Directors’ fees derived by non-resident aliens deemed to be not engaged in a trade or business are subject to a final withholding tax at a rate of 25%.

Investment income – In general, interest on peso deposits and yields, or any other monetary benefit derived from deposit substitutes, trust funds and similar arrangements, is subject to a final 20% withholding tax. However, interest on certain long-term deposits or investments evidenced by qualifying certificates is exempt from the final 20% withholding tax. Final tax is imposed at rates ranging from 5% to 20% on the income from long-term deposits if the investment is withdrawn before the end of the fifth year. Interest received by residents on foreign-currency deposits is subject to a final 15% withholding tax. Interest received by non-resident individuals on foreign-currency deposits is exempt from tax.

Cash or property dividends actually or constructively received by citizens and resident aliens from domestic corporations, as well as a partner’s share in the after-tax profits of a partnership (except a general professional partnership), are subject to final withholding tax at a rate of 10%. Non-resident aliens engaged in a trade or business in the Philippines are subject to final withholding tax on these types of income at a rate of 20%. For non-resident aliens not engaged in a trade or business in the Philippines, investment income is generally taxed at a rate of 25%, except for gains from sales of real estate and sales of shares of domestic corporations.

Rental income – Rental income is considered business income and is taxed at the standard rates.

Taxation of employer-provided stock options – In general, employer-provided stock options are taxable to the employee as additional compensation or fringe benefit at the time the option is exercised. Revenue Memorandum Circular (RMC) No. 79-2014 provides for the tax treatment of employee income arising from the grant, exercise and sale of stock options. It states that for both Equity Settlement Options and Cash Settlement Options, the difference between the book value or fair market value of the shares, whichever is higher, at the time the stock option is exercised, and the price fixed on the grant date shall, on exercise of the option, be treated in the following manner:

• additional compensation subject to income tax and to withholding tax on compensation, if the option is granted by an employer to a rank-and-file employee involving the employer’s own shares of stock or shares owned by it
• a fringe benefit subject to FBT, if the employee receiving and exercising the option occupies a supervisory or managerial position

The RMC also imposed reportorial requirements on the issuing corporation with respect to the grant and exercise of options.