Tax Law Amendments RA 9337 2005

Scope: income tax and VAT changes

Section 1 amends multiple provisions of the National Internal Revenue Code of 1997 governing income tax rates on domestic corporations, certain passive income, and the minimum corporate income tax, including definitions of “gross income” and “cost of goods sold/cost of services.”
Section 2 amends provisions governing income tax rates on foreign corporations, including resident and nonresident foreign corporations, with rules on international carriers, offshore banking units, branch profit remittances, and regional/area headquarters.
Section 3 amends deductions for business expenses and interest, including limits tied to final tax treatment of interest income.
Sections 4 to 10 amend core VAT rules on: VAT on goods, VAT on importation of goods, VAT on services and lease/use of property, VAT exemptions, tax credits/refunds, and invoicing requirements.
The VAT rules apply to VAT-registered persons and set the tax treatment for zero-rated and exempt transactions, including allocation and refund timelines.
The amendments expressly incorporate operational mechanics that depend on implementing rules issued by the Secretary of Finance and administered through the Commissioner of Internal Revenue.

Income tax: domestic corporations and minimum tax

Section 27(A)(In General) imposes an income tax of 35% on the taxable income of every corporation taxable under the Code, with the rate becoming 30% effective January 1, 2009.
For corporations using the fiscal-year accounting period, taxable income is computed without regard to specific transaction dates; the tax rate is applied by multiplying the number of months covered by the new rate in the fiscal year and dividing by twelve.
Section 27(A)(Provided, option to tax gross income) authorizes the President, upon recommendation of the Secretary of Finance, to allow qualifying corporations to be taxed at 15% of gross income, effective January 1, 2000, only if enumerated tax-effort and fiscal conditions are satisfied.
The gross-income option is available only to firms whose ratio of cost of sales to gross sales or receipts does not exceed 55% and the election is irrevocable for three (3) consecutive taxable years while the corporation qualifies.
Section 27(A)(gross income derived from business) defines “gross income” from business as gross sales less sales returns, discounts and allowances and cost of goods sold, with detailed definitions of cost of goods sold for trading/merchandising and manufacturing concerns, and gross income for service sellers as gross receipts less sales returns, allowances and discounts.
Section 27(B) imposes a 10% income tax on the taxable income of proprietary educational institutions and hospitals which are nonprofit, except that the 10% rate does not apply when gross income from unrelated activities exceeds 50% of total gross income; in that case the normal corporate rate under Section 27(A) applies to the entire taxable income.
Section 27(C) provides that all government-owned or government-controlled corporations, agencies, or instrumentalities (except GSIS, SSS, PHIC, and PCSO) pay the same corporate income tax rate imposed under Section 27 for similar businesses.
Section 27(D) imposes final withholding taxes on specified passive incomes and capital gains, including:
- 20% final tax on interest on currency bank deposits and yield or monetary benefits from deposit substitutes and trust funds, and on royalties, derived from sources within the Philippines; with 7 1/2% final tax on interest income derived by a domestic corporation from a depository system.
- Final tax on net capital gains from sale of shares of stock not traded in the stock exchange: 5% if not over P100,000, and 10% if amount is in excess of P100,000.
- Expanded foreign currency deposit system: exemption from all taxes except net income specified by the Secretary of Finance (upon Monetary Board recommendation) to be subject to regular bank income tax; 10% final tax on interest income from foreign currency loans granted to residents other than offshore banking units or other depository banks under the system; and exemption from income tax for nonresidents’ income from transactions with depository banks under the expanded system.
- Intercorporate dividends: dividends received by a domestic corporation from another domestic corporation are not subject to tax.
- Final tax on gains presumed realized from sale/exchange/disposition of lands and/or buildings not actually used in the business of a corporation and treated as capital assets: 6% of the gain based on gross selling price or fair market value, whichever is higher.
Section 27(E)(1) imposes a minimum corporate income tax of 2% of gross income as of the end of the taxable year, beginning on the fourth taxable year immediately following the year the corporation commenced operations, when the minimum income tax is greater than the normal tax under Section 27(A).
Section 27(E)(2) allows carry-forward of excess minimum tax: any excess is carried forward and credited against normal income tax for the three (3) immediately succeeding taxable years.
Section 27(E)(3) authorizes the Secretary of Finance to suspend the minimum corporate income tax for corporations suffering losses due to prolonged labor dispute, force majeure, or legitimate business reverses, and to issue rules (upon Commissioner recommendation) defining the terms and conditions for suspension in meritorious cases.
Section 27(E)(4) defines “gross income” for applying the minimum corporate income tax as gross sales less sales returns, discounts and allowances and cost of goods sold, with further rules on cost for trading/merchandising, manufacturing, and service taxpayers; for service taxpayers, “gross income” means gross receipts less sales returns, allowances, discounts and cost of services, and “cost of services” includes direct costs and expenses, including salaries and employee benefits of personnel, consultants and specialists directly rendering service, and direct facility costs such as depreciation or rental and supplies; for banks, “cost of services” includes interest expense.

Income tax: foreign corporations and special regimes

Section 28(A)(1) imposes income tax on a resident foreign corporation engaged in trade or business in the Philippines: 35% of taxable income from sources within the Philippines, reduced to 30% effective January 1, 2009; fiscal-year rate application follows the same months/new-rate computation.
Section 28(A)(1) option to tax gross income grants a resident foreign corporation the option to be taxed at 15% on gross income under the same conditions provided in Section 27(A).
Section 28(A)(2) imposes a minimum corporate income tax of 2% of gross income on resident foreign corporations under the same conditions as the domestic minimum corporate income tax.
Section 28(A)(3) imposes 2 1/2% (as written in the provision) on Gross Philippine Billings for an international carrier doing business in the Philippines, and defines Gross Philippine Billings for:
- International air carrier: gross revenue from carriage of persons, excess baggage, cargo and mail originating from the Philippines in continuous and uninterrupted flight, with rules on revalidated/exchanged/indorsed tickets and transshipment from flights originating in the Philippines.
- International shipping: gross revenue for passenger, cargo, or mail originating from the Philippines up to final destination, regardless of ticket/freight document sale/payment location.
Section 28(A)(4) exempts from all taxes (except net income specified by the Secretary of Finance upon Monetary Board recommendation and subject to regular bank income tax) the income derived by offshore banking units from foreign currency transactions with nonresidents and other covered institutions; 10% final tax applies to interest income on foreign currency loans to residents other than offshore banking units or covered local banks; nonresidents’ income from transactions with offshore banking units is exempt from income tax.
Section 28(A)(5) taxes branch profits remittances at 15% on total profits applied or earmarked for remittance without deduction for the tax component (except activities registered with the Philippine Economic Zone Authority), collected and paid under the mechanics of Sections 57 and 58; interest/dividends/rents/royalties and related gains are not treated as branch profits unless effectively connected with trade or business in the Philippines.
Section 28(A)(6) provides that:
- Regional or area headquarters as defined in Section 22(DD) are not subject to income tax.
- Regional operating headquarters as defined in Section 22(EE) pay 10% of taxable income.
Section 28(A)(7) imposes special tax treatments on certain incomes received by resident foreign corporations, including:
- 20% final tax on interest on currency bank deposits and yield/monetary benefits from deposit substitutes and trust funds and on royalties from sources within the Philippines; with 7 1/2% for interest from a depository bank under the expanded foreign currency deposit system.
- Expanded foreign currency deposit system rules mirroring the domestic regime (exemption except specified net income; 10% final tax on interest on foreign currency loans to residents other than offshore banking units or covered depository banks; nonresident income exempt from income tax).
- Final tax on net capital gains from sale of shares not traded through the stock exchange: 5% if not over P100,000, 10% if in excess of P100,000.
- Intercorporate dividends: dividends received from a domestic corporation liable to tax are not subject to tax under this Title.
Section 28(B)(1) imposes tax on a nonresident foreign corporation not engaged in trade or business in the Philippines: 35% of gross income from sources within the Philippines, reduced to 30% effective January 1, 2009; the tax covers listed gross incomes (interests, dividends, rents, royalties, salaries, premiums, annuities, emoluments, fixed/determinable periodic or casual gains, profits, income, and capital gains), except capital gains subject to the separate stock-share capital gains rule in Section 28(B)(5)(c).
Section 28(B)(2) imposes 25% tax on the gross income from all sources within the Philippines of a nonresident cinematographic film owner, lessor, or distributor.
Section 28(B)(3) imposes 4 1/2% on gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations as approved by the Maritime Industry Authority for nonresident owners/lessors of vessels chartered by Philippine nationals.
Section 28(B)(4) imposes 7 1/2% on gross rentals or fees for nonresident lessors of aircraft, machineries and other equipment.
Section 28(B)(5) imposes final withholding tax on certain nonresident foreign corporation incomes:
- 20% final withholding tax on interest on foreign loans contracted on or after August 1, 1986.
- 15% final withholding tax on cash/property dividends from domestic corporations, with a credit mechanism for taxes deemed paid in the Philippines, initially framed as the difference between 35% regular income tax and 15% on dividends, and with an updated credit stated to be equivalent to 15% difference for tax effective January 1, 2009.
- Capital gains from sale of shares not traded through the stock exchange: 5% if not over P100,000 and 10% if in excess of P100,000.

Deductions and expense rules

Section 34(B)(1) states that deductions from gross income are allowed for ordinary and necessary expenses paid or incurred during the taxable year in carrying on or directly attributable to the development, management, operation, and/or conduct of the trade, business or exercise of a profession, with examples including:
- Reasonable salaries, wages, and compensation for personal services actually rendered, including grossed-up fringe benefits furnished or granted by the employer, provided the final tax under Section 33 has been paid.
- Reasonable travel expenses while away from home in pursuit of trade, business or profession.
- Reasonable rentals and/or other payments required as a condition for continued use or possession of property without title or equity other than that of a lessee, user, or possessor.
- Reasonable entertainment, amusement and recreation expenses directly connected to business, not to exceed ceilings prescribed by the Secretary of Finance by rules and regulations upon recommendation of the Commissioner, considering needs and special circumstances and the nature and character of the industry/trade/business/profession.
Expenses contrary to law, morals, public policy or public order are never allowed as deductions.
Section 34(A)(1)(b) requires substantiation for deductions: no deduction is allowed unless the taxpayer substantiates with sufficient evidence (such as official receipts or other adequate records) both the amount and the direct connection/relation of the expense to the taxpayer’s trade, business or profession.
Section 34(A)(1)(c) disallows deductions for payments that constitute bribes or kickbacks, including payments to national or local government officials or employees, government-owned or -controlled corporation officials or employees, foreign government officials or employees or representatives, and private corporate officers or representatives or similar entities, if the payment constitutes a bribe or kickback.
Section 34(A)(2) allows private educational institutions (under Section 27(B)) to elect either to deduct expenditures treated as capital outlays of depreciable assets incurred during the taxable year for expansion of school facilities, or to deduct depreciation allowance under Subsection (F).
Section 34(B)(1) Interest allows deduction for interest paid or incurred on indebtedness connected to the taxpayer’s profession, trade or business, subject to reduction of the allowable interest expense by 42%, effective January 1, 2009 reducing the percentage to 33%, where the interest expense would otherwise be allowable deduction and where related interest income is subject to final tax.

VAT on goods, importation, and services

Section 106(A) levies and collects VAT equivalent to 10% of the gross selling price or gross value in money of goods or properties sold, bartered or exchanged, payable by the seller/transferor.
The President may raise the VAT rate to 12% effective January 1, 2006 after specified conditions are satisfied, including VAT collection as a percentage of GDP exceeding 2 4/5% or national government deficit as a percentage of GDP exceeding 1 1/2% (written as 1 A12% in the text).
Section 106(A)(1) defines “goods or properties” broadly to include tangible and intangible objects capable of pecuniary estimation, including enumerated rights and privileges and utility time such as radio/television/satellite transmission and cable television time.
Section 106(A)(1) defines “gross selling price” as the total money or its equivalent the purchaser pays or is obligated to pay, excluding VAT, and including excise tax, if any.
Section 106(A)(2) subjects export sales to 0% rate and defines “export sales” to include actual shipment to a foreign country and specific sales of raw materials/packaging to nonresident buyers and export-oriented enterprises with accounting requirements and enumerated inclusions (including sale of gold to the BSP and goods/supplies/equipment/fuel for international shipping or international air transport operations).
Section 106(A)(2)(b) covers foreign currency denominated sales for 0% rate when goods assembled/manufactured in the Philippines are delivered to a resident in the Philippines, paid for in acceptable foreign currency, and accounted for as required.
Section 106(A)(2)(c) provides 0% rate for sales to persons/entities whose exemption under special laws or international agreements effectively subjects the sale to zero rate.
Section 106(B) treats certain transfers as “deemed sale,” including use/consumption not in the course of business, distribution to shareholders/investors as share in profits or to creditors for debt payment, consignment where actual sale is not made within sixty (60) days, and retirement/cessation with respect to inventories of taxable goods existing at retirement/cessation.
Section 106(C) applies VAT to goods disposed of or existing as of a certain date if the status of a person as a VAT-registered person changes or terminates under circumstances to be promulgated by the Secretary of Finance upon recommendation of the Commissioner.
Section 106(D) allows deductions from gross sales for sales returns and allowances by a VAT-registered person in the quarter of refund credit memorandum/refund issuance, and allows exclusion of sales discounts indicated in the invoice at the time of sale and not dependent on a future event within the same quarter it is given.
Section 106(E) empowers the Commissioner to determine the appropriate tax base by rules and regulations when a transaction is deemed sale or when gross selling price is unreasonably lower than actual market value.
Section 107(A) levies VAT on importation of goods at 10% based on the total value used by the Bureau of Customs in determining tariff/customs duties plus customs duties, excise taxes (if any), and other charges; VAT must be paid prior to release from customs custody, with an alternate base where customs duties are determined by quantity/volume: landed cost plus excise taxes, if any; the VAT rate can be raised to 12% effective January 1, 2006 upon satisfaction of specified GDP-based conditions (same thresholds as for Section 106).
Section 107(B) makes purchasers/transferees/recipients liable as importers when tax-exempt goods are subsequently sold/transferred/exchanged to non-exempt persons; the tax due constitutes a lien superior to all charges or liens irrespective of possessor.
Section 108(A) levies VAT of 10% on gross receipts from sale or exchange of services, including use or lease of properties, payable on the sale/exchange of services; the VAT can be raised to 12% effective January 1, 2006 upon satisfaction of the same GDP-based conditions.
Section 108(A) defines “sale or exchange of services” broadly to include performance of services in the Philippines for others for a fee, remuneration or consideration, and enumerates many service categories; it also includes specified leases/uses/right privileges of various IP/equipment, supply of knowledge/information, ancillary services enabling application/enjoyment, and services connected with use/installation/operation of apparatus purchased from nonresident persons, technical advice/assistance, and leases of film time and satellite/cable television time.
Lease of properties is subject to VAT regardless of where the lease/ licensing contract is executed if the property is leased/used in the Philippines.
Section 108(A) defines “gross receipts” as total contract price/compensation/service fee/rental/royalty including amounts charged for materials supplied with services and deposits/advanced payments actually or constructively received during the taxable quarter for services performed or to be performed, excluding VAT.
Section 108(B) subjects specified services performed in the Philippines by VAT-registered persons to 0% rate, including processing/manufacturing/repacking for export where paid in acceptable foreign currency and properly accounted for, services to persons engaged in business outside the Philippines or nonresident persons outside the Philippines, services whose supply is effectively zero-rated under exemptions in special laws/international agreements, services to international shipping/air transport operations (including leases), services performed by subcontractors/contractors for enterprises whose export sales exceed 70%, transport of passengers and cargo by air/sea from the Philippines to a foreign country, and sale of power/fuel generated through renewable sources using specified technologies.

VAT exemptions and elections

Section 109(1) exempts the following transactions from VAT, subject to Section 109(2):
- Sale or importation of agricultural and marine food products in their original state; livestock and poultry of a kind used/yielding foods for human consumption; and breeding stock and genetic materials therefor, with “original state” preserved even with simple processes such as freezing, drying, salting, broiling, roasting, smoking or stripping; polished/husked rice, corn grits, raw cane sugar and molasses, ordinary salt, and copra are treated as original state.
- Sale or importation of fertilizers; seeds/seedlings/fingerlings; fish/prawn/livestock/poultry feeds including ingredients used to manufacture finished feeds, except specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals, and other animals generally considered pets.
- Importation of personal and household effects of Philippine residents returning from abroad and nonresident citizens coming to resettle in the Philippines, exempt from customs duties under the Tariff and Customs Code.
- Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects (except vehicles, vessels, aircraft, machinery, other goods for commercial quantity manufacture/merchandise) by persons coming to settle in the Philippines for own use not for sale/barter/exchange, accompanying them or arriving within ninety (90) days before or after arrival, upon satisfactory evidence to the Commissioner that the residence change is bona fide.
- Services subject to percentage tax under Title V.
- Services by agricultural contract growers and milling for others of palay into rice, corn into grits, and sugar cane into raw sugar.
- Medical, dental, hospital, and veterinary services except those rendered by professionals.
- Educational services rendered by private educational institutions duly accredited by the DepEd, CHED, TESDA and government educational institutions.
- Services rendered by individuals pursuant to an employer-employee relationship.
- Services rendered by regional or area headquarters established in the Philippines by multinational corporations acting as supervisory/communications/coordinating centers for affiliates/subsidiaries/branches in the Asia-Pacific Region and not earning income from the Philippines.
- Transactions exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529.
- Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to members and sale of produce to non-members, including importation of direct farm inputs/machineries/equipment and spare parts used directly and exclusively in production/processing of produce.
- Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority.
- Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the Cooperative Development Authority, if the share capital contribution of each member does not exceed P15,000 and regardless of aggregate capital and net surplus ratably distributed among members.
- Export sales by persons who are not VAT-registered.
- Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, or real property utilized for low-cost and socialized housing under Republic Act No. 7279 (Urban Development and Housing Act of 1992) and other related laws, including:
  - residential lot valued at P1,500,000 and below;
  - house and lot and other residential dwellings valued at P2,500,000 and below.
  - amounts must be adjusted not later than January 31, 2009 and every three (3) years thereafter using the Consumer Price Index as published by the NSO.
- Lease of a residential unit with monthly rental not exceeding P10,000, with adjustment not later than January 31, 2009 and every three (3) years thereafter using the Consumer Price Index as published by the NSO.
- Sale, importation, printing or publication of books and any newspaper/magazine/review/bulletin published at regular intervals with fixed prices for subscription/sale and not principally devoted to paid advertisements.
- Sale, importation or lease of passenger or cargo vessels and aircraft, including engine/equipment/spare parts thereof, for domestic or international transport operations.
- Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations.
- Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries.
- Sale or lease of goods/properties or performance of services other than transactions in prior paragraphs where gross annual sales/receipts do not exceed P1,500,000; the amount is adjusted not later than January 31, 2009 and every three (3) years thereafter using the Consumer Price Index as published by the NSO.
Section 109(2) permits a VAT-registered person to elect that Subsection (1) not apply to its sale of goods/properties or services, with the election being irrevocable for three (3) years from the quarter the election is made.

VAT input tax credits and refunds

Section 110(A)(1) provides that any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113 on specified transactions is creditable against output tax, including purchases/importation of goods for sale, conversion into/for finished product for sale, use as supplies in the course of business, use in services sales, or use in trade/business for which depreciation/amortization is allowed; and purchase of services on which VAT has actually been paid.
Section 110(A)(2) makes input tax on domestic purchases/importations creditable to the purchaser upon consummation of sale and to the importer upon payment of VAT prior to release from Bureau of Customs custody.
Section 110(A)(2) requires spreading input VAT on capital goods: if aggregate acquisition cost excluding VAT exceeds P1,000,000, input VAT is spread evenly over the month of acquisition and the fifty-nine (59) succeeding months; if estimated useful life is less than five (5) years, input VAT is spread over the shorter period.
Section 110(A)(2) allows input VAT credit for services, lease or use of properties upon payment of the compensation/rental/royalty/fee.
Section 110(A)(3) grants a VAT-registered person also engaged in non-VAT transactions tax credit by allowing total input tax directly attributed to VAT transactions, and a ratable portion of input tax not directly attributed.
Section 110(A) defines:
- “input tax” as VAT due from or paid by a VAT-registered person on importation/local purchase of goods or services,