Resident citizens are taxed on their worldwide income while resident foreigners and non-resident citizens are liable to tax only on their Philippine-sourced income. Married couples are required to compute their individual income tax separately and file a joint income tax return.
Income from the following sources are taxable: trade or business income, professional income, gains derived from dealings in property, interest, rental income, royalties, dividends, annuities, prizes and winnings, pensions, and other income.
Taxable income is computed by deducting income-generating expenses and personal allowances from gross income. Net income from different sources is aggregated and income tax is levied at progressive rates on the total taxable income.
|TAXABLE INCOME, PHP (US$)||TAX RATE|
|Up to 10,000 (US$248)||5%|
|10,000 – 30,000 (US$744)||10% on band over US$248|
|30,000 – 70,000 (US$1,737)||15% on band over US$744|
|70,000 – 140,000 (US$3,473)||20% on band over US$1,737|
|140,000 – 250,000 (US$6,202)||25% on band over US$3,473|
|250,000 – 500,000 (US$12,404)||30% on band over US$6,202|
|Over 500,000 (US$12,404)||32% on all income over US$12,404|
|Source: Global Property Guide|
Personal allowances or deductions from the taxable income are:
Depreciation costs can be set against income for the purpose of income tax. Approved methods are the straight-line, the declining balance, sum of years-digits, unit of production method, the operating day method, and any other method as prescribed by the Secretary of Finance.
Rental income is taxed at progressive rates and income-generating expenses are deductible. Typical deductions are repairs and maintenance, depreciation, taxes and licenses (local business tax, mayor’s business permit, and real estate tax).
A business permit is required before renting out property.
Under existing VAT regulations, rental payments exceeding PHP10,000 (US$248) per unit received by landlords whose gross annual rental income exceed PHP1,500,000 (US$36,311) are subject to 12% VAT. If the gross annual rental income is less than PHP1,500,000 (US$36,311), the applicable tax rate is 3%. The VAT burden is generally shouldered by the tenants.
Capital gains realized from the sale of real property treated as ordinary assets are included in the aggregate income and taxed at progressive rates. Taxable capital gains are computed by deducting acquisition costs and incidental expenses from the gross selling price or fair market value of the property.
The Philippines has a tax called Capital Gains Tax but it is really a transaction tax on selling or transferring real estate properties classified as capital assets. This tax is not an actual tax on the gains incurred on the sale of the property. The capital gains tax is levied at a flat rate of 6% on the property’s gross selling price or market value (see “Costs of Buying Property”).
Real estate tax is levied on Philippine real property and the applicable rate varies depending on the location. The maximum rate that a city or municipality within Metro Manila may impose is 1% whole cities and municipalities outside Metro Manila may levy the tax at the rate not exceeding 2%. The owner has the option to pay the tax in four equal installments on or before the last day of each calendar quarter.
Calculating the Property’s Assessed Value
The tax is levied on the property’s assessed value (which is a prescribed percentage of current fair market value depending on actual use and zoning of property). In computing for the taxable value, the property’s fair market value is determined and the assessment percentage is then applied. The resulting amount is the tax base where the real estate tax rate is applied.
ASSESSMENT LEVELS ON BUILDINGS
|FAIR MARKET VALUE, PHP (US$)|
|Up to 175,000 (US$4,236)|
|175,001 - 300,000 (US$7,262)|
|300,001 - 500,000 (US$12,104)|
|500,001 - 750,000 (US$18,156)|
|750,001 - 1 million (US$24,207)|
|1 million - 2 million (US$48,415)|
|2 million - 5 million (US$121,036)|
|5 million - 10 million (US$242,073)|
|Over 10 million (US$242,073)|
ASSESSMENT LEVELS ON LAND
|Source: Global Property Guide|
Property owners are required to file a sworn statement declaring the true (current and fair market value) of their property once every three years. The filing period is from 01 January to 30 June annually.
Income and capital gains earned by companies are taxed at a flat rate of 30%. Income-generating expenses are deductible when calculating taxable income.
A 10% surtax is imposed on improperly accumulated earnings.
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