PHILIPPINES Law and Practice Contributed by: Carina Laforteza, Joanna Marie Joson, Kristina Paola Frias and Joanna Marie Reyes, SyCip Salazar Hernandez & Gatmaitan
operating income do not exceed the VAT threshold (currently at PHP3 million) have the option to avail themselves of an 8% tax on gross sales or gross receipts and other non-operating income in excess of PHP250,000 in lieu of the graduated income tax rates and the 3% percentage tax; • 12% VAT or 3% percentage tax for non-VAT-regis - tered individuals; and • local taxes, the rates of which vary depending on the type and location of the business. Taxable income is defined as gross income less deductions allowed under the Philippine Tax Code or other special laws. Taxable income is not entirely based on accounting profits. Certain items are income for accounting pur - poses but are not taxable under the Tax Code. Certain deductions are allowable for accounting purposes but not under the Tax Code, and vice versa. For instance, accounting income should be adjusted to exclude from taxable income any income that has been subject to final tax, and to add back expenses that are not deductible under tax laws (eg, provisions for bad debts since, under the Tax Code, bad debts must be written off to be deductible). Taxable income is generally calculated in accordance with the method of accounting regularly employed in keeping the books of the taxpayer, but if no such method of accounting has been so employed, or if such method does not clearly reflect the income, the calculation will be made in accordance with such method as, in the opinion of the CIR, clearly reflects the income. In the Philippines, the accounting method is generally based on the Philippine Financial Report - ing Standards (PFRS), but in case of a conflict between the PFRS and tax law and regulations, the latter shall prevail for purposes of income taxation. 2.2 Technology Investments Income earned by an alien or a foreign corporation from the use of intellectual property in the Philippines 2. Corporate Tax Regime 2.1 Taxable Profits
is considered as Philippine-sourced income and is subject to Philippine income tax. Income earned by a resident citizen or a domestic corporation from the use of intellectual property within or outside the Philip - pines will be subject to Philippine income tax. Businesses conducting research and development (R&D) activities may be granted fiscal incentives such as the income tax holiday (ITH) for a certain period. Under the 2020 Investment Priorities Plan, which was integrated into the 2022 Strategic Investment Priority Plan of the Philippines, “innovation drivers” such as R&D activities have been identified as preferred activi - ties for investment subject to incentives. Innovation drivers also cover the commercialisation of new and emerging technologies, uncommercialised patents on products and services, and products of locally under - taken R&D activities, such as agricultural biotechnol - ogy tools, photonics and nanotechnology, and natural health products. A taxpayer may treat R&D expenditures, which are paid or incurred during the taxable year in connection with the taxpayer’s business as ordinary and neces - sary expenses, as deductible expenses during the taxable year when they were paid or incurred. However, subject to relevant rules and regulations, the taxpayer may opt to treat as deferred expenses R&D expenditures that are: • paid or incurred by the taxpayer in connection with their business; • not treated as deductible expenses; and • chargeable to capital account but not chargeable to property subject to depreciation or depletion. Such deferred expenses shall be amortised over a period of not less than 60 months, as may be elected by the taxpayer beginning with the month in which the taxpayer first realises benefits from such expen - ditures. Under the Corporate Recovery and Tax Incentives for Enterprises Act (the “CREATE Law”), RBEs under the EDR may avail themselves of a 100% additional deduction on R&D expenditures incurred in the tax - able year.
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