Law Summary
Taxation of Proprietary Educational Institutions and Hospitals
- Nonprofit proprietary educational institutions and hospitals taxed at 10% on taxable income.
- If unrelated business income exceeds 50%, entire income taxed at standard corporate rates.
- "Unrelated trade or business" means activities not substantially related to primary functions.
Taxation of Government-Owned or Controlled Corporations
- All government-owned/controlled corporations except GSIS, SSS, PHIC, and PCSO taxed like similar private entities.
Tax on Certain Passive Income
- 20% final tax on interest from deposits, royalties from Philippine sources; 7.5% on interest from deposit systems.
- Capital gains on sale of non-exchange traded shares taxed at 5% (up to P100,000) and 10% for excess.
- Income from certain foreign currency deposit systems exempt or subject to specified rates.
- Intercorporate dividends between domestic corporations tax-exempt.
- 6% final tax on capital gains from sale of unused lands/buildings.
Minimum Corporate Income Tax (MCIT)
- 2% of gross income imposed from fourth taxable year if MCIT exceeds regular income tax.
- Excess MCIT can be carried forward for three years.
- Suspension of MCIT possible under specified conditions (labor disputes, force majeure).
- Gross income for MCIT defined similarly to other provisions with details on costs.
Income Tax on Foreign Corporations
- Resident foreign corporations taxed at 35%, dropping to 30% from 2009; option for 15% gross income tax.
- Minimum tax of 2% gross income applies similar to domestic corporations.
- International carriers taxed on gross Philippine billings at specified rates.
- Offshore banking units granted tax exemptions except for certain specified incomes.
- 15% tax on branch profit remittances, various other rates on specific incomes.
- Nonresident foreign corporations taxed at 35% on Philippine-sourced gross income, with special rates for films, vessel leases, and aircraft rentals.
Income Tax Deductions
- Ordinary and necessary business expenses deductible if substantiated.
- Disallowance of deduction for bribes, kickbacks, and unlawful expenses.
- Specific provisions for private educational institutions on capital outlays.
- Interest expense deductions reduced by percentages of interest income subject to final tax.
Value-Added Tax (VAT) on Sale of Goods
- Imposes 10% VAT on sale, barter, exchange of goods; to increase to 12% upon certain economic conditions.
- Defines "goods or properties" broadly including intangible rights and real properties held for discharge.
- zero-rated sales include exports and sales to international shipping and air transport.
- Sales returns, allowances and discounts treated specifically for VAT computation.
VAT on Importation of Goods
- VAT imposed at 10% (to increase to 12% under conditions) on importation based on customs valuation plus duties.
- Subsequent sale of goods imported as tax-exempt may render buyers liable for VAT.
VAT on Services and Use/Lease of Properties
- 10% VAT on gross receipts from services and lease of properties; subject to increase to 12% conditions.
- Lists various services included, such as contractors, brokers, hotels, restaurants, utilities, and intellectual property.
- Zero-rated services include certain export-related transactions and transport services.
Exempt VAT Transactions
- Sales or importation of specified agricultural products, personal effects, educational services, and some cooperatives exempt from VAT.
- Sales and leases below threshold amounts exempt with provisions for adjustment over time.
- Option for VAT-registered persons to waive exemptions and be subject to VAT.
Input Tax Credits
- Input tax on purchases/imports creditable against output tax when properly evidenced.
- Credit apportionment rules for persons engaged in both VAT and non-VAT transactions.
- Definition of input and output tax clarified.
Transitional and Presumptive Input Tax Credits
- Transition input tax credits granted on beginning inventory for new VAT registrants.
- Presumptive credits allowed for specific processing or manufacturing enterprises.
Refunds and Tax Credits of Input Tax
- VAT-registered persons with zero-rated sales may apply for input tax refunds within two years.
- Procedures and timelines for refund approvals and appeals specified.
VAT Invoicing and Accounting Requirements
- VAT-registered persons must issue VAT invoices or official receipts containing specified information.
- Accounting records including subsidiary journals required.
- Penalties for wrongful issuance of VAT invoices or failure to indicate VAT-exempt or zero-rated sales.
VAT Returns and Payment
- VAT returns filed quarterly; monthly payments for registered persons.
- Withholding tax provisions for government payments related to VAT-covered goods and services.
Gross Receipts Tax on VAT-Exempt Persons
- Persons exempt from VAT pay 3% gross receipts tax; cooperatives exempted.
Percentage Tax on Domestic Carriers and Garages
- 3% tax on quarterly gross receipts of domestic transporters and garage keepers.
- Minimum quarterly gross receipts defined per vehicle type and location.
Franchise Tax on Selected Utilities
- Broadcasting companies with annual gross receipts below P10 million pay 3%; gas and water utilities pay 2%.
- Broadcasting companies may opt to register under VAT system irrevocably.
Tax on Banks and Quasi-Banking Institutions
- Schedules tax rates on various income types; highest rates on lending with short maturity.
- Applies also to persons performing similar financial functions.
Excise Taxes on Mineral Oils and Fuels
- Specifies tax rates on lubricating oils, gas, waxes, alcohol, gasoline, aviation fuels, kerosene, diesel, LPG, asphalt, bunker fuel.
- Provision for crediting excise paid on feedstock and treatment of reprocessed oils.
Excise Tax on Minerals and Quarry Resources
- Levies excise tax on coal, nonmetallic minerals, metallic minerals (rate ramping over years), and indigenous petroleum.
- Defines terms "gross output," "minerals," "mineral products," and "quarry resources."
Registration and Compliance
- Requires registration for those subject to internal revenue tax with specific timelines.
- Annual registration fee imposed with exemptions.
- Requires registration for each tax type and updates for changes.
- VAT registration mandatory when sales/receipts exceed threshold.
- Optional VAT registration allowed with irrevocability clause.
- Assigns taxpayer identification numbers (TIN) and penalizes multiple TINs.
Issuance of Receipts and Invoices
- Requires sales or commercial invoices/receipts for transactions of P25 or more.
- Retention periods and storage of original and duplicate documents mandated.
- Exemptions possible in meritorious cases by Commissioner.
Disposition of Incremental Revenues
- Designates incremental revenues from documentary stamp and excise taxes to specific programs (socialized housing, health insurance, education, infrastructure, tobacco producer support).
- Earmarks funds from excise taxes on alcohol and tobacco for health insurance and disease prevention.
- Allocates 50% of local government portion of VAT incremental revenue to education, health, environment, and agriculture.
- Funds earmarked for public information and education on VAT compliance.
Abolition of Franchise Tax on Domestic Airlines
- Franchise tax on domestic airlines abolished.
- Airlines subject to corporate income tax and VAT registration requirements.
- Airlines exempt from other taxes, fees, royalties per franchise agreements.
Rulemaking, Repealing, Separability, and Effectivity
- Secretary of Finance to promulgate implementing rules by June 30, 2005.
- Revokes inconsistent laws and provisions.
- Contains separability clause and effective date of July 1, 2005.
This summary captures the key provisions, scopes, procedures, and penalties, reflecting the comprehensive amendments to the National Internal Revenue Code under the act.