Policy, purpose, and intent
- The decree implements reforms to transform the tax system into an effective tool for restructuring the country’s social, economic, and political institutions.
- The decree aims to simplify tax incentive policies, increase government financial resources, and improve redistribution of income and wealth.
- The decree seeks to modernize the tax system and make it more responsive to the needs of a developing economy.
Coverage and what the amendments change
- Section 1 amends Title I (Organization of the Bureau) of the National Internal Revenue Code by revising selected sections and inserting a new Section 8-A.
- Section 2 amends Title II (Income Tax) by revising selected provisions.
- The substantive rules cover the Bureau of Internal Revenue organization, enforcement powers, and core income tax computations and filing obligations for individuals and corporations.
Bureau powers, regulations, and districts
- Section 3 provides that the Bureau of Internal Revenue shall:
- assess and collect all national internal revenue taxes, fees, and charges;
- enforce all forfeitures, penalties, and fines connected with those taxes; and
- execute judgments in cases decided in its favor by the Court of Tax Appeals and ordinary courts.
- Section 3 further requires the Bureau to give effect to and administer the supervisory and police power conferred by this Code or other laws.
- Section 4 requires Bureau regulations to specify, prescribe, or define rules on:
- canvassing provinces by provincial treasurers for discovery of persons properly liable, including custody and recordkeeping of lists;
- labeling/branding/marking of goods subject to specific tax;
- handling of goods intended for export that would otherwise be subject to specific tax;
- legal actions and proceedings by revenue officers, provincial fiscals, and related officials;
- recordkeeping for persons authorized to keep prohibited drugs;
- conditions for importation of opium, storage, removal for use, and marking/labeling;
- conditions for transfer of prohibited drugs between authorized persons;
- bonded warehouse conveyance, storage, entry/recordkeeping, storekeepers’ books, and reports for supervision;
- removal and dealing of alcohol intended for arts and industries, including denaturing materials, denaturing process, bonds, books and records, entries, reports to the Commissioner of Internal Revenue, and display of signs;
- collection and payment of revenue and handling of tax stamps (including affixing/cancellation), and rules for books/records/invoices and the collection and return of licenses and stamps;
- enforcement rules for Title III estate and inheritance, gifts, and related acquisitions mortis causa;
- preparation and reporting of income tax returns, information, and reports, including evidence of payment to taxpayers and publication of income tax statistics;
- payment channels for internal revenue taxes through Bureau collection agents or authorized agent commercial banks deputized to receive payments, together with returns/papers/statements.
- Section 8 authorizes the Commissioner, with the approval of the Secretary of Finance, to divide the Philippines into revenue districts for administrative purposes, each supervised by a Revenue District Officer.
Regional and district officer functions
- Section 8-A creates the Revenue Regional Director under rules and regulations, policies, and standards of the Commissioner.
- Section 8-A requires the Regional Director, within the region and district offices under jurisdiction, to:
- implement department/agency laws, policies, plans, and programs;
- administer and enforce internal revenue laws and regulations, including assessment and collection;
- provide economical, efficient, and effective service;
- coordinate with regional offices and other departments, bureaus, and agencies;
- coordinate with local government units;
- exercise control and supervision over officers and employees; and
- perform other functions provided by law and delegated by the Commissioner.
- Section 9 imposes on each Revenue District Officer and other internal revenue officers/employees the duty to ensure faithful execution and compliance with laws and regulations on national internal revenues.
- Section 9 requires Revenue District Officers to examine efficiency of supervised officers/employees and to report in writing to the Commissioner (through the Regional Director) neglect of duty, incompetency, delinquency, or malfeasance, with supporting facts and evidence.
- Section 11 requires the Commissioner to employ and assign internal revenue officers to regional offices, and requires the Regional Director to assign them to establishments or places where articles subject to specific tax are produced or kept.
Oaths, testimony, and officer authority
- Section 16 grants authority to administer oaths and take testimony in official matters or investigations touching Bureau matters to:
- the Commissioner of Internal Revenue,
- the Deputy Commissioners,
- chiefs and assistant chiefs of divisions,
- special deputies of the Commissioner,
- internal revenue officers, and
- any other Bureau employee specially deputized by the Commissioner.
Income tax—individual rates and residency
- Section 21(a) imposes a tax on taxable net income received during each taxable year from all sources by every individual, including both citizens/residents and aliens residing in the Philippines, computed according to a graduated schedule.
- Section 21(a) provides that nonresident citizens are taxed under the schedule only on income derived from sources within the Philippines.
- Section 21(a) sets the graduated Philippine schedule beginning with:
- Not over P2,000 — 3%; and then rising by specified brackets and marginal rates up to:
- Over P500,000.
- Section 21 imposes a separate tax on nonresident citizens’ income from sources without the Philippines (gross amount), using the following brackets:
- Most over $6,000 — 1%
- Over $6,000 but not over $20,000 — 2%
- Over $20,000 — 3%
- Section 21 defines nonresident citizen for this section as one who establishes, to the satisfaction of the Commissioner, physical presence abroad for an uninterrupted period including an entire taxable year.
Income tax—nonresident alien tax rules
- Section 22(a) provides that a nonresident alien engaged in trade or business within the Philippines is taxed each taxable year on entire net income from all sources within the Philippines using the same tax imposed by Section 21, with the proviso that a nonresident alien who comes to the Philippines and stays for an aggregate period of more than one hundred eighty days in any calendar year is deemed “doing business” in the Philippines.
- Section 22(b) provides that a nonresident alien not engaged in trade or business within the Philippines is taxed each taxable year on income from specified categories from sources within the Philippines (including interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remuneration, emoluments, other fixed or determinable annual or periodical or casual gains, profits, income, and capital gains) at 30 per centum of such income.
Personal exemptions and dependency
- Section 23(a) allows personal exemptions as deductions from net income.
- Section 23(a) sets:
- Single individuals or legally separated spouses: PHP 1,800.
- Married persons or heads of family: PHP 3,000 (only one exemption of PHP 3,000 from the aggregate income of both husband and wife when not legally separated).
- Section 23 defines head of family to include an unmarried man or woman with qualifying dependents living with and dependent upon him or her for chief support, with the dependents not more than 21 years of age, unmarried, not gainfully employed, or incapable of self-support due to mental or physical defect.
- Section 23(c) provides an additional exemption for dependents: PHP 1,000 for each legitimate, recognized natural, or adopted child wholly dependent upon and living with the taxpayer, subject to:
- age limit of not more than twenty-one years of age, unmarried, and not gainfully employed, or incapable of self-support due to mental or physical defect; and
- maximum of four dependents for additional exemptions.
- Section 23 provides “Change of status” rules:
- If a taxpayer marries or acquires additional dependents during the taxable year, the taxpayer may claim corresponding personal exemptions in full for that year.
- If the taxpayer dies during the taxable year, the estate may claim personal and additional deductions as if death occurred at year-end.
- If the spouse or dependents die or become twenty-one years old during the taxable year, the taxpayer may claim the exemptions as if death occurred, or as if they became twenty-one at year-end.
- Section 23 provides that a nonresident alien individual engaged in trade or business in the Philippines may claim personal exemptions equal to the exemptions allowed by the income tax law of the foreign country of which he is a subject/citizen to citizens of that country, but capped at the Philippine exemption levels, provided the nonresident alien files a true and accurate return of total income from all sources in the Philippines as required by this Title.
Corporation tax rates and special corporate categories
- Section 24(a) imposes tax on domestic corporations’ taxable net income (from all sources in the Philippines) with graduated rates:
- 25% on the amount not exceeding PHP 100,000; and
- 35% on the excess over PHP 100,000.
- Section 24 sets special corporate rates:
- private educational institutions other than those exempt under Section 21(e): 10% of taxable net income;
- building and loan associations operating under the General Banking Act: 12% of taxable net income;
- international carriers: 2½% on gross Philippine billings.
- Section 24(b) imposes on foreign corporations not engaged in trade or business in the Philippines (including foreign life insurance companies not engaged in life insurance business in the Philippines) a tax equal to 35% of gross income from all sources within the Philippines as interest, dividends, rents, royalties, salaries, wages, premiums, annuities, compensations, remunerations for technical services or otherwise, emoluments, other fixed or determinable annual/periodical/casual gains, profits and income, and capital gains.
- Section 24(b) excludes reinsurance premiums from the “premiums” taxed under the foreign corporation rule and imposes 15% on gross income of cinematographic film owners, lessors, or distributors.
- Section 24 requires resident corporations (organized/authorized/existing under foreign laws but engaged in trade or business within the Philippines) to be taxed on total net income received in the preceding taxable year from all sources within the Philippines under the domestic corporation scheme.
- Section 24(d) imposes life insurance company tax:
- domestic life insurance companies: 8 3/4% on net investment income, exempt from income tax for three years from the date of issuance of certificate of authority;
- foreign life insurance companies engaged in life insurance business in the Philippines: the rate in the relevant paragraph on a computed portion of net investment income from sources within the Philippines.
- Section 24 defines “net investment income” for a domestic life insurance company as gross investment income derived from sources within and outside the Philippines less investment expenses.
- Section 24 defines and computes foreign life insurance “net investment income from all sources within the Philippines” using ratios tied to Philippine reserve versus total world reserve, and Philippine investment income versus total world investment income, and identifies “gross investment income” and “investment expenses” for that computation.
- Section 24 requires that all corporate taxpayers not specifically exempt under Sections 24(c)(1) and 27 pay the rates in Section 24.
- Section 24 requires that government-owned or controlled corporations and agencies/instrumentalities (excluding educational institutions) pay the rates in Section 24 on taxable net income as imposed on associations/corporations engaged in similar business or industry.
Gross income definition and exclusions
- Section 29(a) defines gross income as gains, profits, and income from salaries, wages, compensation for personal services, professions, vocations, trades, businesses, commerce, sales or dealings in property (real or personal), and from interests, rents, dividends, securities, and transactions of any business carried on for gain or profit, plus gains/profits/income from any source whatever.
- Section 29(b) provides specific exclusions from gross income and exemption from taxation under this Title, including:
- life insurance proceeds paid to beneficiaries upon death of the insured (with interest payments held by the insurer included in gross income);
- return of premium amounts received by the insured under life insurance/endowment/annuity contracts;
- property acquired by gift, bequests, devise, or descent (with income from such property included in gross income);
- interest on obligations of the Government of the Republic of the Philippines or political subdivisions (with post-approval-of-the-Code interest exempt only to the extent in the issuing act);
- compensation for personal injuries or sickness under accident/health insurance and Workmen’s Compensation Acts, including damages received by suit or agreement on account of such injuries or sickness;
- income exempt under treaty obligations binding on the Government of the Philippines;
- certain miscellaneous items including specified income from loans/stock/bonds/domestic securities and bank deposits in the Philippines by foreign governments, financing institutions owned/controlled/refinanced by them, and international/regional financing institutions established by governments;
- income derived from public utility or essential governmental functions accruing to the Government or political subdivision;
- income derived as rewards under Republic Act No. 2338;
- dividends received from domestic corporations by domestic or resident foreign corporations, where only 25% is returnable for purposes of the tax imposed by Section 24.
Deductions from gross income
- Section 30(a) requires that, in computing net income, a deduction be allowed for ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business, including reasonable salaries/compensation for personal services actually rendered, travel expenses while away from home in pursuit of the trade/business, and rentals or other payments required for continued use/possession of property the taxpayer does not own or has no equity in.
- Section 30(a)(1) limits entertainment expenses for an individual to not in excess of PHP 1,000 or 5% of gross income, whichever is lesser, with deduction claims supported by corresponding vouchers/receipts for amounts exceeding the allowance.
- Section 30(a)(2) allows specific deductions for citizens or resident individuals:
- medical care expenses incurred and paid in the Philippines for the taxpayer, spouse, or dependents as defined in Section 23(c), excluding medicines, capped at PHP 500 for the taxpayer plus PHP 500 for the spouse and each dependent, not to exceed PHP 2,000 aggregate;
- proof requirements require taxpayer to furnish names/addresses of payees, amounts, and dates of actual payment, supported by a receipt or statement showing nature of service, amount, date, and other information required by the Commissioner;
- basic tuition fees for dependents studying in high schools in the Philippines capped at PHP 250 per dependent, not exceeding PHP 1,000 aggregate.
- Section 30 defines “basic tuition fees” for the tuition deduction as amounts paid for the privilege to receive instruction in a high school, excluding matriculation and miscellaneous fees such as library/athletic fees, laboratory fee, entrance fee, ROTC fee, student council fee, graduation fee, and similar fees.
- Section 30 requires proof for basic tuition fees claims by furnishing each dependent child’s name and date of birth, plus amount and date of payment, and requiring a receipt or statement from the school showing total school fees paid, breakdown, and any other required info by the Commissioner.
- Section 30(a)(3) limits deductions for nonresident alien individuals and foreign corporations to necessary expenses paid/incurred in carrying on any business or trade conducted within the Philippines exclusively.
- Section 30 provides interest deductions:
- generally, interest paid within the year on indebtedness is deductible except on indebtedness incurred/continued to purchase or carry obligations the interest upon which is exempt from taxation as income under this Title;
- for nonresident aliens and foreign corporations, allowable interest is proportional to gross income from sources within the Philippines divided by gross income from all sources within and without the Philippines, and is allowed only if the taxpayer includes in the return all information necessary to calculate the proportion.
- Section 30 provides tax deductions with exclusions:
- taxes paid or accrued within the taxable year are deductible except income tax under this Title; income/war profits/excess profits taxes imposed by foreign authority (with a specific rule tied to foreign tax credit election); estate, inheritance, and gift taxes; and taxes assessed against local benefits tending to increase property value.
- Section 30 imposes limitation rules on deductions for taxes:
- nonresident aliens and foreign corporations may deduct only taxes connected with income from sources within the Philippines;
- for a citizen residing in a foreign country whose income from source within that foreign country is not taxable under this Title, only the portion corresponding to net income taxable under this Title is deductible.
- Section 30 allows a foreign tax credit only if the taxpayer signifies in the return an election for its benefits; credits are computed subject to proportional limitations and a maximum credit cap based on income sourced within/outside the Philippines.
- Section 30 bars foreign tax credits for nonresident alien individuals and foreign corporations.
- Section 30 provides adjustment rules when accrued taxes paid differ from claimed credits or tax refunds occur:
- the taxpayer must notify the Commissioner;
- the Commissioner redetermines tax and any additional payment or credit/refund is handled upon notice and demand.
- Section 30 requires, as a condition precedent to allowance of the foreign tax credit, that the Commissioner may require a bond with sureties acceptable to and approved by the Commissioner in a sum he requires if accrued taxes have not been paid.
- Section 30 provides rules on the year in which credits may be taken:
- credits may, at the option of the taxpayer and irrespective of accounting method, be taken in the year the foreign-country taxes accrue, but if elected, subsequent years’ credits must be taken on the same basis and no portion of those taxes is allowed as a deduction in the same or succeeding year.
- Section 30 establishes proof requirements for foreign tax credits, requiring satisfaction of the Commissioner regarding:
- total income from sources without the Philippines,
- income by country,
- the foreign tax paid/accrued claimed as credit (to be determined under Finance Secretary rules), and
- all other necessary information for verification and computation.
- Section 30 provides corporate-deemed-paid foreign tax rules for domestic corporations owning a majority of voting stock of foreign corporations paying dividends, and assigns rules for how “accumulated profits” are determined and how dividends paid within the first 60 days are treated.
- Section 30 provides that the deduction for taxes allowed for a corporation does not permit the shareholder a corresponding deduction for taxes paid by the corporation without reimbursement.
Losses and bad debts, depreciation, and depletion
- Section 30 allows deduction of losses and specifies categories and limitations, including:
- losses actually sustained during the taxable year and not compensated by insurance or otherwise for individuals (in trade or business; in transactions for profit; or property losses from fires, storms, shipwrecks, casualty, robbery, theft, or embezzlement), with a prohibition on allowing a loss if claimed as a deduction for estate or inheritance tax purposes in the estate/inheritance tax return where such loss was claimed at filing of the return;
- corporate losses actually sustained and charged off within the taxable year and not compensated by insurance or otherwise;
- losses deductible by nonresident aliens and foreign corporations restricted to Philippine business/trade and Philippine property losses from specified events, plus losses in profit transactions in the Philippines not connected with business/trade, subject to insurance non-compensation;
- capital losses subject to Section 34, and treatment of worthless securities as sale/exchange losses on the last day of the taxable year;
- wash sale losses per Section 33;
- wagering losses limited to the amount of wagering gains.
- Section 30 provides bad debt deductions:
- in general, debts actually ascertained to be worthless and charged off within the taxable year;
- for nonresident aliens and foreign corporations, bad debts deductible only if arisen in the course of business/trade conducted within the Philippines.
- Section 30 provides securities becoming worthless treatment as capital asset sale/exchange loss, except for banks/trust companies where rules differ.
- Section 30 provides depreciation deductions:
- a reasonable allowance for deterioration of property arising out of its use/employment in business/trade or out of its nonuse, with a rule that when authorized allowance equals capital invested (or fair market value as of March 1, 1913 for purchases made prior), no further allowance is made;
- trust and life-tenant apportionment rules for who is entitled to depreciation deduction.
- Section 30 allows depreciation for nonresident aliens and foreign corporations only when the property is located within the Philippines.
- Section 30 provides depletion allowances for oil and gas wells and mines:
- for calendar year 1973 and fiscal year beginning July 1, 1973, depletion allowance is based on gross income but capped so it does not exceed 35% of net income or net profit, whichever is lower; and for calendar year 1974 and fiscal year beginning July 1, 1974, capped at 25%.
- percentage depletion by mineral is set with:
- 27½% for oil and gas wells;
- 23% for mines listed (including chromite, copper, gold, iron, manganese, mercury, nickel, and silver; anorthosite to the extent aluminum/aluminum compounds extracted; antimony, asbestos, bauxite, beryl, bismuth, brucite, cadmium, celestite, coal, cobalt, columbium, corundum, flourspar, germanium, graphite, ilmenite, kynanite, lead, lignite, lithium, marble, mercury, mica, molybdenum, olivine, platinum and platinum group metals, quartz crystal (radio grade), rutile, talc, tantalum, thorium, tin, titanium, tungsten, uranium, vanadium, zinc, and zircon); and
- 15% for mines listed (including ball, brick, china, sagger, and tile clay; bentonite; mollusk shells; peat; perlite; pumice; scoria; shale; sodium chloride; and wallastonite).
- the deduction applies after deducting rents/royalties paid or incurred by the taxpayer regarding the property.
- it provides exclusions from “all other minerals” including gravel, sand, and stone in loose formation used in construction purposes; soil, sod, dirt, turf, water, or mosses; and minerals from sea water, air, or similar inexhaustible sources.
- beginning calendar year 1975 and fiscal year beginning July 1, 1975, depletion is computed using reasonable allowance for actual reduction/flow for oil and gas wells and reasonable allowance for mine product depletion not to exceed market value of product mined and sold during the year, under rules by the Finance Secretary, and with the capital-investment ceiling.
- depletion for nonresident aliens and foreign corporations for oil and gas wells/mines is allowed only for those located within the Philippines.
Charitable contributions deduction and caps
- Section 30 allows deduction of contributions or gifts actually paid or made within the taxable year to/for the Government of the Philippines or political subdivisions for exclusively public purposes, and to eligible domestic corporations/associations organized and operated exclusively for specified purposes (religious, charitable, scientific, athletic, cultural, educational, and rehabilitation of veterans).
- Section 30 caps deductible contributions at not in excess of 6% for individuals and 3% for corporations of the taxpayer’s taxable net income computed without the benefit of this deduction rule.
- Section 30 grants full deduction treatment for specified donations that are deductible in full and not counted for the maximum deductible limitation, including enumerated donations to:
- government-recognized schools, colleges, and universities (general or special purposes) subject to the restriction that the donation is not for salary increase/bonus/personal benefits to school officials/faculty/personnel (and their stockholders/officials depending on public or private schools);
- Artesian Well Fund under Republic Act No. 977;
- International Rice Research Institute under Republic Act No. 2707;
- National Science Development Board and its agencies and specified educational institutions and scientific/research foundations under Republic Act No. 3589;
- Ramon Magsaysay Award Foundation under Republic Act No. 3676;
- University of the Philippines and other state colleges/universities subject to the same limitations in paragraph one;
- Philippine Rural Reconstruction Movement;
- Catholic Relief Services-NCWC and Tools for Freedom Foundation under Republic Act No. 4481;
- Cultural Center of the Philippines;
- Philippine Amateur Athletic Federation;
- Trustees of the Press Foundation of Asia, Inc.;
- National Commission on Culture; and
- Humanitarian Science Foundation and Roxas Education and Welfare Committee, Inc.
- Section 30 subjects all other contributions/donations to the limitation caps.
- Section 30 requires deductions for contributions/gifts to be verified under rules and regulations prescribed by the Finance Secretary.
Nonresident alien deductions conditions
- Section 30 allows a nonresident alien individual to receive the benefits of deductions only by filing or causing to be filed with the Commissioner of Internal Revenue a true and accurate return of total income received from all sources in the Philippines in the manner prescribed.
- Section 30 directs that if the nonresident alien fails to file the return, the Commissioner shall collect the tax on such income.
Pension trusts deduction rule
- Section 30 allows an employer establishing or maintaining a pension trust for reasonable pensions to employees as a deduction (in addition to trust contributions during the taxable year covering pension liability accruing during the year) a reasonable amount transferred or paid into the trust during the taxable year in excess of such contributions.
- Section 30 conditions the additional pension trust deduction on:
- the amount not having been previously allowable as a deduction; and
- the amount being apportioned in equal parts over ten consecutive years beginning with the year of transfer/payment.
Optional standard deduction for individuals
- Section 30 allows an individual (other than a nonresident alien) to elect, in lieu of itemized deductions allowed under Section 30, an optional standard deduction.
- The optional standard deduction equals PHP 5,000 or 10% of gross income, whichever is lesser.
- If the taxpayer does not signify the intention to elect the optional standard deduction in the return, the