PHILIPPINES Law and Practice Contributed by: Carina Laforteza, Joanna Marie Joson, Kristina Paola Frias and Joanna Marie Reyes, SyCip Salazar Hernandez & Gatmaitan
under the government’s strategic investment priorities plan. 9.6 Hybrid Instruments and BEPS Implementation The Philippines has not adopted hybrid mismatch rules in response to BEPS. The fourth proposed tax reform package provides for a unified income tax rate for passive income such as interest, dividends and capital gains. Generally, the current policy of the Philippine govern - ment is to develop a capital market by providing an efficient regulatory framework and, in terms of taxa - tion, harmonising taxes on capital transactions to become simpler, fairer and more efficient. 9.7 Interest Deductibility and Territorial Tax Regime The Philippines has primarily a territorial tax regime, although resident citizens and domestic corporations are taxed on worldwide income. Consistent with territoriality, non-residents are taxed only on Philip - pine-source income. Interest income is considered Philippine-sourced if it arises from loans extended to residents. The Philippines applies a tax arbitrage rule on deduct - ible interest that reduces the allowable deduction for interest expenses by 20% of the interest income sub - ject to final tax. This is intended to bridge the gap between the ordinary corporate income tax rate of 25% and the final tax rate on interest income, which is generally 20%. Also, interest expense deduction will not be allowed if the interest payment is between two corporations, more than 50% of the stock of which is owned directly or indirectly by or for the same individual, if either one of the corporations is a personal holding company. A personal holding company is one that meets the stock ownership and gross income requirements under the tax regulations. Under the stock ownership require - ment, more than 50% in value of the personal holding company’s outstanding stock must be owned, directly or indirectly, by not more than five individuals. Under the gross income requirement, 70% or more of the
gross income of the corporation must be classified as personal holding company income. 9.8 Controlled Foreign Corporation Reform Considering that the Philippines has joined the OECD/ G20 Inclusive Framework on BEPS, the Philippines will have to participate in the implementation of the BEPS package of 15 measures, which includes the reduction of incentives to prevent taxpayers from shifting income to low-tax rate jurisdictions. Philip - pine tax laws providing for fiscal incentives have been amended, but it is worth noting thatbroad CFC rules may not necessarily achieve the purpose of prevent - ing the shifting of income to lower tax jurisdictions since there may be other reasons for locating offshore subsidiaries in low-tax-rate jurisdictions. At the same time, CFC proposals would still pull certain offshore passive income into the tax net, curbing profit-shifting but potentially overreaching into legitimate business structures, such as subsidiaries set up for regional operations, or financing. 9.9 Anti-Avoidance Rules The Philippines’ general anti-avoidance rules are largely based on principles arising from Supreme Court decisions, which made a distinction between tax avoidance and tax evasion. Tax avoidance is “the tax-saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arm’s length”. What the law clearly prohibits is tax evasion, which is considered the wil - ful attempt, in any manner, to evade or defeat any tax imposed under the Philippine Tax Code. The Supreme Court nonetheless considers transactions that are prompted more by the mitigation of tax liabilities than for legitimate business purposes as entered into for tax evasion purposes. The Philippines’ tax treaties with certain countries have taken into account the limitation-on-benefits provisions in double taxation conventions. 9.10 Transfer Pricing and IP Taxation The current transfer pricing regulations require tax - payers to keep adequate documentation to show that transfer prices are consistent with the arm’s length principle, but such documents are not required to be
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