Philippines

Inventory valuation

Inventories are generally stated at the lower of cost or net realisable value. Last in first out (LIFO) is not allowed for tax purposes. Generally, the inventory valuation method for tax purposes must conform to that used for financial reporting purposes.

Capital gains

Capital gains are not generally subject to CIT but may be subject to capital gains tax. See Capital gains tax in the Other taxes section for more information.

Dividend income

Dividends received by a domestic or resident foreign corporation from another domestic corporation are not subject to tax. These dividends are excluded from the taxable income of the recipient.

Dividends received by a non-resident foreign corporation from a domestic corporation are subject to a general final WHT at the rate of 25%. A lower rate of 15% applies if the country in which the corporation is domiciled either (i) does not impose income tax on such dividends or (ii) allows a tax deemed paid credit of 10% or the difference between the CIT and 15% tax on dividends. Treaty rates ranging from 10% to 25% may also apply if the recipient is a resident of a country with which the Philippines has a tax treaty (see the Withholding taxes section).

Stock dividends

A Philippine corporation can distribute stock dividends tax-free, proportionately to all shareholders. The subsequent cancellation or redemption of such stocks, however, shall be taxable to the extent that it represents a distribution of earnings.

Interest income

Interest on bank savings, time deposits, deposit substitutes, and money market placements received by domestic or resident foreign corporations from a domestic corporation are subject to a final tax of 20%, while interest income derived from FCDU deposits is subject to a final tax of 15%. Such income is excluded from gross income reportable in CIT returns.

Interest income of FCDUs from foreign currency loans granted by depository banks to residents other than OBUs or other FCDUs of depository banks shall be subject to 10% tax. The preferential tax for OBUs is repealed under the CREATE Law.

Royalty income

Royalties received by domestic or resident foreign corporations from a domestic corporation are subject to a final tax of 20%. 

Other significant items

Other items exempt from CIT include the following:

• Proceeds of life insurance policies.
• Return of policy premium.
• Gifts, bequests, and devises.
• Interest on certain government securities.
• Income exempt under a treaty.
• Gains from sale, exchange, or retirement of bonds, with a maturity of five years.
• Gains from redemption of shares of stock in mutual fund companies.

Foreign income

A Philippine (domestic) corporation is taxed on its worldwide income. A domestic corporation is taxed on income from foreign sources when earned or received, depending on the accounting method used by the taxpayer.

Income earned through a foreign subsidiary is taxed only when paid to a Philippine resident shareholder as a dividend. Under the CREATE Law, such dividend may be exempt from Philippine tax, subject to the following conditions:

• The funds from such dividends actually received or remitted into the Philippines are reinvested in the business operations of the domestic corporation in the Philippines within the next taxable year from the time the foreign-sourced dividends were received and shall be limited to funding the working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries, and infrastructure project.
• The domestic corporation directly holds at least 20% of the outstanding shares of the foreign corporation for at least two years at the time of the dividend distribution.

Meanwhile, income earned through a foreign branch is taxed as it accrues. The losses incurred by the foreign branch are deductible against other income earned by the Philippine corporation.

For Filipino citizens and domestic corporations, foreign taxes may either be credited against income tax due or claimed as a deduction against gross income for income tax purposes.