Moderate taxes for foreigners engaged in trade or business
Taxation Researcher | November 21, 2017
Effective Tax Rate on Rental Income
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Nonresident (i.e. whose stay in the country does not exceed 180 days) foreigners are liable to tax on their Philippine-sourced income. Married couples are required to compute their individual income tax liability separately but they must file a joint tax return.
Nonresident foreigners are classified depending on business activities and the applicable taxation rules depend on this classification:
- Nonresident foreigners engaged in trade or business in the Philippines
- Nonresident foreigners not engaged in trade or business in the country
Acquisition and ownership of land in the Philippines is restricted to Philippine citizens or corporations (at least 60% of equity is owned by Filipinos). To acquire ownership or a land, residential house and lot, or commercial building and lot, foreign investors may have to establish or invest in an existing Philippine corporation but in no case should their equity exceed 40% of the total capital of the corporation. However, a foreign investor may own condominium units or a townhouse (provided that the land on which the property is built is owned by a Filipino or a corporation of which at least 60% of the equity is owned by Filipinos).
Computation of taxable income as well as applicable income tax rates depend on the nonresident´s classification, whether they are engaged in business in the country or not.
Non-resident foreigners engaged in trade or business in the Philippines: net income is taxed at progressive rates. Taxable income is computed by deducting income-generating expenses and personal allowances from gross income.
|TAXABLE INCOME, PHP (US$)||TAX RATE|
|Up to 10,000 (US$200)||5%|
|10,000 - 30,000 (US$600)||10% on band over US$200|
|30,000 - 70,000 (US$1,400)||15% on band over US$600|
|70,000 - 140,000 (US$2,800)||20% on band over US$1,400|
|140,000 - 250,000 (US$5,000)||25% on band over US$2,800|
|250,000 - 500,000 (US$10,870)||30% on band over US$5,000|
|Over 500,000 (US$10,000)||32% on all income over US$10,000|
|Source: Global Property Guide|
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.
Nonresident foreigners who are NOT engaged in trade or business in the Philippines: gross income is taxed at 25%. No deductions or allowances are available to nonresident foreigners who are not engaged in trade or business in the country.
Taxable income is computed by deducting income-generating expenses and personal allowances from gross income. Nonresident foreigners are not allowed to elect a standard deduction. Typical deductions are repairs and maintenance, depreciation, and taxes and licenses, which include local business tax, mayor´s permit and real property tax. The amount of deductible expenses can range from 40% to 90% of gross rental income.
A business permit is required before renting out property.
Value Added Tax (VAT)
Under existing regulations, a 12% Value Added Tax (VAT) is imposed on residential property leases that satisfy certain conditions. The VAT burden is generally shouldered by the tenants.
Properties with rental payments exceeding PHP12,800 (US$26) per month received by landlords whose gross annual rental income exceed PHP1,919,500 (US$38,390) are subject to 12% VAT.
Properties with rental payments exceeding PHP12,800 (US$26) per month received by landlords whose gross annual rental income is less than PHP1,919,500 (US$38,390), are not subject to VAT. Instead, it will be liable for percentage tax at a flat rate of 3% levied on the gross rent.
Properties with rental payments below PHP12,800 (US$26) per month are exempt from VAT.
It is necessary to classify the property as either ordinary asset or capital asset to determine the treatment of its capital gains taxation.
Ordinary assets are properties that are used in trade or business, such as a rental property. 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.
Properties considered as ordinary assets are not liable to pay the Capital Gains Tax, which is really a transaction tax (see "Costs of Buying Property").
Capital assets are properties that are not used in trade or business.
Capital Gains Tax
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
Real estate tax is levied on Philippine real property and the applicable rate varies depending on the location. The maximum rate for cities and municipalities within Metro Manila is 1%, while the maximum rate for cities and municipalities outside Metro Manila is 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$3,500)|
|175,000 - 300,000 (US$6,000)|
|300,000 - 500,000 (US$10,000)|
|500,000 - 750,000 (US$15,000)|
|750,000 - 1 million (US$20,000)|
|1 million - 2 million (US$40,000)|
|2 million - 5 million (US$100,000)|
|5 million - 10 million (US$200,000)|
|Over 10 million (US$200,000)|
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.
Special Education Fund (SEF)
The local government where the property is located may collect special education fund (SEF) at a flat rate of 1%, which is levied on the property´s assessed value. This tax is levied 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.