PHILIPPINES Law and Practice Contributed by: Carina Laforteza, Joanna Marie Joson, Kristina Paola Frias and Joanna Marie Reyes, SyCip Salazar Hernandez & Gatmaitan
tion to another domestic corporation or to a resident foreign corporation are not subject to income tax. Sole Proprietorships Sole proprietorships, on the other hand, have no separate juridical personality. Proprietors are taxed as individuals, and the income tax rates range from 0% to 35%. 1.2 Use and Taxation of Transparent Business Structures The transparent entities commonly used in the Phil - ippines ‒ GPPs and unincorporated joint ventures or consortiums ‒ are exempt from income tax. The income tax is imposed on their partners or consortium members. GPPs are formed by persons for the sole purpose of exercising their common profession, while non- taxable unincorporated joint ventures or consorti - ums are those formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Philippine government. 1.3 Tests for Determining Tax Residence The incorporation test is used in determining the resi - dence of incorporated businesses for Philippine taxa - tion purposes. A corporation organised under Philippine laws is a domestic corporation, while a corporation organised under the laws of a foreign country is a foreign cor - poration. A foreign corporation doing business in the Philippines (for example, through a branch) is consid - ered a resident foreign corporation. A non-resident foreign corporation refers to a foreign corporation not engaged in trade or business within the Philippines. For income tax purposes, domestic corporations are taxed on their worldwide income; foreign corporations are taxed only on their Philippine-sourced income. Income tax of domestic and resident foreign corpo - rations is based on their taxable income, or gross income less allowable deductions, while non-resident
foreign corporations are taxed on their gross income, without deductions. The residence of transparent entities is generally not material since they are exempt from income tax. How - ever, the determination of the residence of the indi - viduals or corporations composing the transparent entity is relevant, as they are the ones directly subject to income tax. 1.4 Applicable Corporate and Individual Tax Rates Corporations are generally subject to the following taxes: • 25% (or 20%) corporate income tax based on tax - able income or 2% MCIT based on gross income, whichever is higher. The MCIT is imposed from the fourth taxable year following the year the corpo - ration commenced its business operations. The taxpayer may ask the Commissioner of Internal Revenue (CIR) to suspend the MCIT under certain circumstances. Any excess MCIT over the regu - lar corporate income tax (RCIT) may be carried forward and credited against the RCIT for the three immediately succeeding taxable years; • 12% value added tax (VAT) or 3% percentage tax for non-VAT-registered corporations; and • local taxes, the rates of which vary depending on the type and location of the business. Transparent entities (ie, GPPs and certain types of unincorporated joint ventures or consortiums) are exempt from income tax but are generally subject to the following taxes: • 12% VAT or 3% percentage tax for non-VAT-regis - tered entities; and • local taxes, the rates of which vary depending on the type and location of the business. Individuals engaged directly in business or through transparent entities are generally subject to the fol - lowing taxes: • 0%–35% graduated income tax. Purely self- employed individuals and/or professionals whose gross sales or gross receipts and other non-
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