Philippines

Value-added tax (VAT)

VAT applies to practically all sales of services and imports, as well as to the sale, barter, exchange, or lease of goods or properties (tangible or intangible). The tax is equivalent to a uniform rate of 12%, based on the gross selling price of goods or properties sold, or gross receipts from the sale of services. On importation of goods, the basis of the tax is the value used by the Bureau of Customs (BOC) in determining tariff and customs duties plus customs duties, excise taxes, if any, and other charges. Where the valuation used by the BOC is by volume or quantity, the VAT basis is the landed cost plus excise taxes, if any.

Certain transactions are zero-rated or exempt from VAT. Export sales by VAT-registered persons are zero-rated.

Certain sales of services exempt from VAT, including services provided by financial intermediaries, are subject to percentage taxes based on gross sales, receipts, or income.

Certain VAT provisions have been amended by the EOPT Act. Salient provisions are the following:

• Imposition of VAT on services based on gross sales and no longer on gross receipts
• VAT invoices are sufficient to substantiate input VAT arising from the purchase of both goods and services
• Removal of ‘business style’ as a VAT invoicing requirement
• VAT invoices are sufficient to substantiate input VAT arising from the purchase of both goods and services
• Classification of VAT refund claims into low-risk, medium-risk, and high-risk based on the amount of VAT refund claim, tax compliance history and frequency of filing, among others. Medium-risk and high-risk claims shall be subject to audit or other verification processes of the BIR. 

• Invoicing requirements: 

  • A VAT official receipt is no longer required to be issued for the sale of services or lease of property. A VAT invoice must be issued instead.

  • ‘Business style’ is no longer required to be indicated on the invoice.

  • If a VAT invoice lacks information required under the invoicing rules:

    • Issuer shall be liable for non-compliance; and

    • Purchaser shall still be allowed to claim the input tax if the invoice contains the sales amount, VAT amount, name and TIN of both parties, description of the goods or service, and transaction date.

• Taxpayers shall issue duly registered invoices for sales valued at PhP500, or when buyer requires, or if seller is VAT-registered

Taxpayers are given six months from the effectivity of implementing regulations that will be issued to comply with the VAT amendments.

Customs duties

Applicable customs duties are determined based on the tariff classification of the import product. As with the rest of the Association of Southeast Asian Nations (ASEAN) countries, tariff classification in the Philippines is based on the ASEAN Harmonised Tariff Nomenclature (AHTN), which is patterned after the Harmonised Commodity Classification and Coding System (HS) Convention and its 2002 revisions, and the latest edition is HS Code 2017 under the Customs Modernization and Tariff Act. 

In 2023, the Tariff Commission issued 924 rulings to address commonly raised valuation and tariff classification issues. Despite this, it is still advisable that tariff classification rulings from the Philippine Tariff Commission be secured prior to importation of goods into the Philippines in case of uncertainty as to the correct classification or valuation. Note that while the tariff classification rulings issued by the Philippine Tariff Commission do not prevent the BOC from conducting its own verification, these rulings carry persuasive references in support of the classification and duty rate used by an importer.

The Philippines adopts the World Trade Organization (WTO) Valuation Agreement, where the declared invoice price is used as the basis for determining customs duties.

As a protective measure, the Philippines retains higher tariff rates (20% to 50%) on certain sensitive agricultural products, such as livestock and meat products, sugar, vegetables, and coffee. A few agricultural commodities are subject to minimum access volumes, but these represent less than 1% of all tariff lines.

In view of the existing free trade agreements in the region, such as the ASEAN-China Free Trade Area (ACFTA), the ASEAN-Korea Free Trade Area (AKFTA), the ASEAN-Australia-New Zealand Free Trade Area (AANZFTA), the ASEAN-Japan Comprehensive Economic Partnership Agreement (AJCEPA), the ASEAN-INDIA Free Trade Area (AIFTA), the Philippine-European Free Trade Association (PH-EFTA), the ASEAN Trade in Goods Agreement (ATIGA), the ASEAN Hong Kong China Free Trade Area (AHKFTA), the Philippine-Japan Economic Partnership Agreement (PJEPA), and the Regional Comprehensive Economic Partnership (RCEP), the Philippines has taken steps to progressively eliminate tariffs. Tariff reductions for the Philippines range from 10% to 35% for most products included in the Normal Track list.

Excise taxes

Excise taxes apply to services and to goods manufactured or produced in the Philippines for domestic sales, consumption, or for any other disposition and to things imported.

Manufactured oils and other fuels

Automobiles

Hybrid vehicles are subject to 50% of the applicable excise tax rates.

Purely electric vehicles and pick-ups are exempt from excise tax.

Sweetened beverages

Conventional 'freebase' or 'classic' nicotine

The rates of tax imposed herein shall apply to any substance in solid, liquid, or gel form, regardless of nicotine content, including nicotine-free substance or any similar product.

Vapor products

The rates of tax imposed herein shall apply to any substance in solid, liquid, or gel form, regardless of nicotine content, including nicotine-free substance or any similar product.

Heated tobacco products

The rates of tax imposed herein shall apply to any substance in solid, liquid, or gel form, regardless of nicotine content, including nicotine-free substance or any similar product.

Nicotine salt

The rates of tax imposed herein shall apply to any substance in solid, liquid, or gel form, regardless of nicotine content, including nicotine-free substance or any similar product.

Novel tobacco products

The rates of tax imposed herein shall apply to any substance in solid, liquid, or gel form, regardless of nicotine content, including nicotine-free substance or any similar product.

Cosmetic procedures

An excise tax of 5% excise tax is imposed on gross receipts from invasive cosmetic procedures and surgeries directed solely towards altering or enhancing the patient’s appearance for aesthetic purposes. However, this will not cover procedures necessary to ameliorate a deformity arising from, or directly related to, a congenital or developmental defect or abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease, tumour, virus or infection.

Documentary stamp tax (DST)

DST is payable at varying rates on various documents and transactions. The following table contains selected examples:

DST on life insurance policies

DST on charter party and similar instruments

Capital gains tax

Capital gains arise from the sale or exchange of ‘capital assets’. Capital assets are property held by the taxpayer (whether or not connected with its trade), other than the following:

• Inventories or property held primarily for sale to customers in the ordinary course of business.
• Real property or depreciable property used in trade or business.
• Property of a kind that would be included in the inventory of the taxpayer if on hand at the close of the taxable year.

Capital losses are deductible only to the extent of capital gains.

There are no holding period requirements for capital assets of corporations.

A 6% final tax is imposed on the higher of the gross selling price or fair market value upon the sale, exchange, or disposition of land or buildings not actually used in the business of a corporation.

Net capital gains derived by domestic and foreign corporations from the sale, exchange, transfer, or similar transactions of Philippine shares of stock not traded through a local stock exchange are taxed at a flat 15% rate.

Sales of shares of stock listed and traded on a local stock exchange, other than the sale by a dealer in securities, are subject to a stock transaction tax of 0.6% based on the gross selling price, provided the listed corporation observes a minimum public ownership of at least 10% based on the company’s issued and outstanding shares, exclusive of any treasury shares or such percentage as may be prescribed by the SEC or Philippine Stock Exchange (PSE), whichever is higher. Otherwise, the 15% capital gains tax shall apply.

Capital gains from the sale of bonds, debentures, or other certificates of indebtedness with a maturity of more than five years are exempt from tax.

Payroll taxes

The compensation and benefits of employees of employers are subject to withholding tax (WHT) based on graduated rates. The employer shall be the designated withholding agent of the government.

Social security contributions

Corporations doing business in the Philippines must be registered with social institutions, such as the Social Security System (SSS), Home Development Mutual Fund (HDMF), and Philippine Health Corporation (PHIC), upon employment of any employee and prior to the due date of the remittance of any social contributions.

Employee contributions for social security are deducted from the employee’s salary payments. The maximum monthly deductions are PHP 900.00 for SSS plus a maximum of PHP 450 mandatory provident fund under the Workers’ Investment and Savings Program (WISP), PHP 200 for HDMF, and PHP 1,000 for PHIC.

Employers are also required to make contributions. Employers’ maximum contribution for each employee is PHP 1,900 per month for SSS plus PHP 950 mandatory provident fund and PHP 30 for Employees' Compensation Program. Employer contributions for HDMF and PHIC are generally of the same amount as the employee contributions.

Fringe benefits tax

A final tax of 35%, payable by the employer, is imposed on the grossed-up monetary value of fringe benefits (e.g. housing, expense accounts, vehicles of any kind, household personnel, interest on loans at lower than market rates [the current benchmark rate is 12%], membership dues for social and athletic clubs, foreign travel expenses, holiday and vacation expenses, educational assistance, insurance) furnished or granted to managerial or supervisory personnel by the employer. An exception is for fringe benefits required by the nature of or necessary to the trade, business, or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer.

The following fringe benefits are not subject to the tax:

• Those authorised and exempted from tax under special laws.
• Contributions of the employer for the benefit of the employee to retirement, insurance, and hospitalisation benefit plans.
• Those granted to rank-and-file employees (however, the employees may be subject to WHT on compensation).
• Those of relatively small value or de minimis benefits.

The fringe benefits tax is payable on a calendar quarter basis and is an additional deductible expense for the employer. Fringe benefits already subjected to fringe benefits tax will no longer form part of the employee’s taxable income.

The grossed-up monetary value of the fringe benefit is generally computed by dividing the actual monetary value of the benefit by 65%.

Donor’s taxes

Donor’s tax is a tax on a donation or gift, and is imposed on the gratuitous transfer of property. It shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.

The donor’s tax rate is fixed at 6% based on total gifts in excess of PHP 250,000 made during the calendar year. However, a sale, exchange, or other transfer made in the ordinary course of business (i.e. bona fide transaction, at arm’s-length, and free from donative intent) shall be considered as made for an adequate and full consideration, and is exempt from donor’s tax.

Local government taxes

Local government units impose local business taxes, which are generally based on the gross sales or gross receipts of the prior year, and real property taxes, which are levied annually on the basis of a fixed proportion of the value of the real property (taxable value). The local business tax rate varies depending on the location of the business, but generally shall not exceed 3%. Real property located in a province may be subject to real property tax of not more than 1% of its taxable value, while real property in a city (or municipality in Metro Manila) may be subject to real property tax of not more than 2% of its taxable value. In addition, an annual tax of 1% of the taxable value of real property shall accrue to the special education fund.