Law Summary
Amendments on Income Tax Rates and Scope for Corporations
- Resident foreign corporations engaged in trade/business within the Philippines are subject to progressive corporate income tax rates:
- 35% (general)
- 34% from Jan 1, 1998
- 33% from Jan 1, 1999
- 32% from Jan 1, 2000 onwards
- Option for resident foreign corporations to be taxed at 15% on gross income under specified conditions.
- Minimum corporate income tax of 2% of gross income is imposed on resident foreign corporations.
Taxation of International Carriers
- International air carriers pay 2.5% tax on gross Philippine billings, defined comprehensively regarding passenger tickets and flights originating in the Philippines.
- International shipping companies pay 2.5% tax on gross revenue from passengers, cargo, and mail originating from the Philippines.
Tax Provisions Specific to Offshore Banking Units
- OBUs authorized by the BSP enjoy exemption from all taxes on income from foreign currency transactions with certain entities except on specified net income subject to regular bank income tax.
- Interest income from loans granted to residents (other than OBUs/local commercial banks) is subject to a 10% final tax.
- Income of nonresident individuals or corporations from transactions with OBUs is exempt.
Tax on Branch Profits Remittances
- A 15% tax is imposed on profits remitted by foreign corporation branches to their head offices.
- This tax is based on total profits earmarked for remittance without deduction for tax components.
- Certain incomes such as interest, dividends, rents, royalties, salaries etc. received by foreign corporations are excluded unless connected with their business in the Philippines.
Taxation of Regional or Area Headquarters
- Regional or area headquarters defined under the law are exempt from income tax.
- Regional operating headquarters must pay 10% income tax on taxable income.
Tax on Certain Incomes Received by Resident Foreign Corporations
- Interest from deposits, deposit substitutes, trust funds, and royalties are subject to a 20% final tax.
- Interest income from depository banks under the expanded foreign currency deposit system is subject to a reduced 7.5% final tax.
- Income from foreign currency transactions with nonresidents and authorized entities is exempt except for specified net income under regular income tax.
- Interest from foreign currency loans to residents other than authorized banks is taxed at 10% final tax.
Capital Gains Tax on Sale of Shares
- A final tax is imposed on net capital gains from sale, barter, or exchange of shares of stock in domestic corporations (except those traded on the stock exchange):
- 5% on gains not exceeding P100,000
- 10% on gains exceeding P100,000
Intercorporate Dividends
- Dividends received by resident foreign corporations from domestic corporations subject to tax are exempt from further tax.
Taxation of Nonresident Foreign Corporations
- Nonresident foreign corporations not engaged in trade/business pay 32-35% tax on gross income from Philippine sources, decreasing from 35% in 1997 to 32% in 2000 onwards.
- Specific tax rates apply to different categories:
- Cinematographic film owners lessors/distributors: 25%
- Owners/lessors of vessels chartered by Philippine nationals: 4.5%
- Owners/lessors of aircraft, machinery, equipment: 7.5%
Final Withholding Taxes on Certain Incomes for Nonresident Foreign Corporations
- 20% final withholding tax on interest from foreign loans contracted on/after August 1, 1996.
- 15% final withholding tax on cash/property dividends from domestic corporations, subject to foreign tax credit equivalence conditions.
- Capital gains tax on net gains from share sales not traded in the stock exchange applies at rates similar to resident corporations.
Separability Clause
- If any part of the Act is declared unconstitutional or invalid, other unaffected provisions remain in full force and effect.
Repealing Clause
- All inconsistent laws, decrees, orders, rules, regulations or parts thereof are repealed or modified accordingly.
Effectivity
- The Act takes effect 15 days after its publication in the Official Gazette or two newspapers of general circulation.