Individual - Income determinationLast reviewed - 25 January 2023
An alien, whether resident or not, is taxed on compensation income earned from services rendered in the Philippines regardless of where payment is made and whether it is remitted into the Philippines. A non-resident alien is not taxed on compensation income for services performed outside the Philippines. Employment income, from the point of view of a non-resident alien engaged in trade or business in the Philippines, includes all payments for services rendered in the Philippines, such as salaries and bonuses, regardless of where payment was made.
Social security contributions, up to the prescribed amount of maximum mandatory contributions, and union dues paid by employees are not included in gross income and are exempt from taxation.
Fringe benefits furnished to managerial and supervisory-level employees by the employer are subject to FBT (see the Taxes on personal income section). Benefits subjected to FBT are no longer included in the employees’ taxable income.
‘Fringe benefits’ are defined as any goods, services, or other benefits furnished or granted in cash or in kind by an employer to an individual employee, except rank and file employees, such as, but not limited to, the following:
- Expense account.
- Vehicles of any kind.
- Household personnel (e.g. maid, driver).
- Interest on a loan at less than the market rate (currently set at 12%) to the extent of the difference between the market rate and the actual rate granted.
- Membership fees, dues, and other expenses borne by the employer for the employee in social and athletic clubs and similar organisations.
- Expenses for foreign travel.
- Holiday and vacation expenses.
- Educational assistance to the employee and dependants.
- Premiums for life insurance, health and other non-life insurance, and similar amounts in excess of what the law allows.
The monetary value of benefits in the form of housing and motor vehicles used for both personal and business purposes is equal to 50% of the lease payment or the depreciation value of the property, whichever is applicable. However, if the housing unit is situated in or adjacent (within 50 metres) to the business premises, the benefit is not taxable. Likewise, a motor vehicle used normally for business purposes is not taxable.
The following fringe benefits are not taxable:
- Fringe benefits required by the nature of or necessary to the trade, business, or profession or for the convenience or advantage of the employer.
- Benefits authorised by and exempted from tax under special laws.
- Employer contributions for the benefit of the employee to retirement, insurance, and hospitalisation benefit plans.
- Benefits given to rank and file employees, whether or not granted under a collective bargaining agreement. However, these are subject to WHT on compensation, unless otherwise tax exempt.
- De minimis (small value) benefits as defined and enumerated in the rules and regulations.
In general, if a fringe benefit is granted in money or directly paid for by the employer, the value of the fringe benefit is the amount granted or paid for. If furnished in property and ownership thereof is transferred to the employee, the value of the fringe benefit is the fair market value of the property as determined by the Commissioner of Internal Revenue, pursuant to the Commissioner’s power to prescribe real property values. If the fringe benefit is granted or furnished by the employer in the form of a property but ownership is not transferred to the employee, the value of the fringe benefit is equal to the depreciation value of the property.
Capital gains and investment income
Non-resident aliens are taxed on Philippine-source capital gains, irrespective of their period of stay in the Philippines. The rates are 0.6% of the gross selling price for shares of stocks listed and traded in the stock exchange; 15% of the net capital gains for unlisted shares of stock, including shares of publicly listed companies that failed to comply with the minimum public ownership (MPO) requirement; and 6% of the higher of the gross sales price or fair market value of real property sold, withheld at the time of sale. Capital losses are deductible only from capital gains. In computing net capital gains or losses from other capital assets, only 50% of the gain or loss is to be taken into account if the capital asset has been held for more than 12 months; otherwise, 100% of the gain or loss is to be considered.
A non-resident alien is also taxed on Philippine-source investment income, such as interest, dividends, and royalties, at the rate of 20% (for those engaged in trade or business in the Philippines) or 25% (for those not engaged in trade or business in the Philippines) as a final tax (or a lower treaty rate). The tax is withheld at source, and the income is not subject to the graduated rates.
Resident aliens are taxed on their Philippine-source income at graduated rates. However, Philippine-source interest and royalties are taxed at 20%. Interest on residents’ deposits under the expanded foreign currency deposit system (FCDU) accounts is taxed at 15%, while interest on long-term deposits or investment in the form of savings, common or individual trust funds, and other investments evidenced by certificates, and so on, is exempt from tax, subject to certain conditions. Interest income on FCDU accounts of non-residents is exempt from tax. Royalties on literary works and musical compositions are subject to a final tax of 10%. Dividend income received from a domestic corporation is taxed at 10% for resident aliens. Tax rates for capital gains from shares of stock and real property are the same as those for non-resident aliens.