Rates of Income Tax on Foreign Corporations
Section 28. Rates of Income Tax on Foreign Corporations
(1) In General
Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to twenty-five percent (25%) of the taxable income derived in the preceding taxable year from all sources within the Philippines effective July 1, 2020.
“In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date when sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period.
“The corporate income tax rate shall be applied on the amount computed by multiplying the number of months covered by the new rate within the fiscal year by the taxable income of the corporation for the period, divided by twelve.
“(2) Minimum Corporate Income Tax of Resident Foreign Corporations. — A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section 27(E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection: Provided, That effective July 1, 2020 until Ju.ne 303 2023, the rate shall be one percent (1%).
“(3) x x x
“(4) Tax on Branch Profits Remittances. - x x x
“(5) Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. -
“(a) Regional or area headquarters as defined in Section 22 (DD) shall not be subject to income tax.
“(b) Regional operating headquarters as defined in Section 22 (EE) shall pay a tax of ten percent (10%) of their taxable income: Provided, That effective January 1, 2022, regional operating headquarters shall be subject to the regular corporate income tax.
“(6) Tax on Certain Incomes Received by a Resident Foreign Corporation. -
“(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties. — Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided, however, That interest income derived by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of fifteen percent (15%) of such interest income.
“(b) Income Derived under the Expanded Foreign Currency Deposit System. - x x x
“(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange.ℒαwρhi৷ — A final tax at the rate of fifteen percent (15%) is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange.
“(d) Intercorporate Dividends. - x x x
“(B) Tax on Nonresident Foreign Corporation. -
“(1) In General. — Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines, effective January 1, 2021, shall pay a ta.x equal to twenty-five percent (25%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c).
(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. -
“(a) Interest on Foreign Loans. - x x x
“(b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57(A) of this Code, subject to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to fifteen percent (15%), which represents the difference between the regular income tax and the fifteen percent (15%) tax on dividends as provided in this subparagraph: Provided, That effective July 1, 2020, the credit against the tax due shall be equivalent to the difference between the regular income tax rate provided in Section 28(B)(1) of this Code and the fifteen percent (15%) tax on dividends;
“(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. — A final senior high schools, public higher education tax at the rate of fifteen percent (15%) is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of the stock exchange.
Section 8. Section 29 of the National Internal Revenue Code of 1997, as amended, on the imposition of improperly accumulated earnings tax, is hereby repealed.
Section 9. Section 34 of the National Internal Revenue Code of 1997, as amended, is hereby further amended to read as follows:
“SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section, in computing taxable income subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B), and (C); and 28(A)(I), there shall be allowed the following deductions from gross income:
“(A) Expenses. -
“(1) Ordinary and Necessary trade, Business or Professional Expenses. -
“(a) x x x
“(i) x x x
“x x x
“(v) An additional deduction from taxable income of one-half (1/2) of the value of labor training expenses incurred for skills development of enterprise-based trainees enrolled in public senior high schools, public higher education institutions, or public technical and vocational institutions and duly covered by an apprenticeship agreement under Presidential Decree No. 442, series of 1974, or the ‘Labor Code of the Philippines’, as amended, shall be granted to enterprises: Provided, further, That for the additional deduction foe enterprise-based training of students from public educational institutions, the enterprise shall secure proper certification from the DepEd, TESDA, or CHED: Provided, finally, That such deduction shall not exceed ten percent (10%) of direct labor wage.
“(B) Interest. -
“(1) In General. - The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer’s profession, trade or business shall be allowed as deduction from gross income: Provided, however, That the taxpayer’s otherwise allowable deduction for interest expense shall be reduced by twenty percent (20%) of the interest income subjected to final tax: Provided, finally, That if the interest income tax is adjusted in the future, the interest expense reduction rate shall be adjusted accordingly based on the prescribed standard formula as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon the recommendation of the Commissioner of Internal Revenue.
“(2) x x x
“(C) Taxes. - x x x
“(D) Losses. - x x x
“(E) Bad debts. - x x x
“(F) Depreciation. - x x x
“(G) Depletion of Oil and Gas Wells and Mines. - x x x
“(H) Charitable and Other Contributions. - x x x
“(I) Research and Development. - x x x
“(J) Pension Trusts. - x x x
“(K) Additional Requirements for Deductibility of Certain Payments. - x x x
“(L) Optional Standard Deduction (OSD). - x x x.
Section 10. Section 40(C)(2) of the National Internal Revenue Code of 1997, as amended, is hereby further amended to read as follows:
“SEC. 40. Determination of Amount and Recognition of Gain or Loss. -
“(C) Exchange of Property. - x x x
“(1) General Rule. - x x x
“(2) Exception. - No gain or loss shall be recognized on a corporation or on it stocks or securities if such corporation is a party to a reorganization and exchanges property in pursuance of a plan of reorganization solely for stock or securities in another corporation that is a party to the reorganization. A reorganization is defined as:
“(a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or
“(b) The acquisition by one corporation, in exchange solely for all or a part of its voting stock, or in exchange solely for all or part of the voting stock of a corporation which is in control of the acquiring corporation, of stock of another corporation if, immediately after the acquisition, the acquiring corporation has control of such other corporation whether or not such acquiring corporation had control immediately before the acquisition; or
“(c) The acquisition by one corporation, in exchange solely for all or a part of its voting stock or in exchange solely for all or part of the voting stock of a corporation which is in control of the acquiring corporation, of substantially all of the properties of another corporation. In determining whether the exchange is solely for stock, the assumption by the acquiring corporation of a liability of the others shall be disregarded; or
“(d) A recapitalization, which shall mean an arrangement whereby the stock and bonds of a corporation are readjusted as to amount, income, or priority or an arrangement of all stockholders and creditors to change and increase or decrease the capitalization or debts of the corporation or both; or
“(e) A reincorporation, which shall mean the formation of the same corporate business with the same assets and the same stakeholders surviving under a new charter.
“No gain or loss shall also be recognized if property is transferred to a corporation by a person, alone or together with others, not exceeding four (4) persons, in exchange for stock or unit of participation in such a corporation of which as a result of such exchange the transferor or transferors, collectively, gains or maintains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property.
“Sale or exchange of property used for business for shares of stock covered under this Subsection shall not be subject to value-added tax.
“In all of the foregoing instances of exchange of property, prior Bureau of Internal Revenue confirmation or tax ruling shall not be required for purposes of availing the tax exemption.
“x x x
“(6) Definitions. -
“(a) x x x
“(b) x x x
“(c) The term ‘control’, when used in this Section, shall mean ownership of stocks in a corporation after the transfer of property possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote: Provided, That the collective and not the individual ownership of all classes of stocks entitled to vote of the transferor or transferors under this Section shall be used in determining the presence of control.
“x x x.
Section 11. Section 57 of the National Internal Revenue Code of 1997, as amended, is hereby further amended to read as follows:
“SEC. 57. Withholding of Tax at Source. -
“(A) x x x
“(B) x x x
“(C) x x x
“The Department of Finance shall review, at least once every three (3) years, regulations and processes for the withholding of creditable tax under this Code, and direct the Bureau of Internal Revenue to amend rules and regulations for the same, should it be found during the review that the existing rules, regulations, and processes for the withholding of creditable tax under this Code adversely and materially impact the taxpayer.
Section 12. Section 109 of the National Internal Revenue Code of 1997, as amended, is hereby further amended to read as follows:
“SEC. 109. Exempt Transactions. -
“(1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax:
“x x x
“(P) Sale of property 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 as defined by Republic Act No. 7279, otherwise known as the ‘Urban Development and Housing Act of 1992,’ and other related laws, residential lot valued at Two million five hundred thousand pesos (P2,500,000.00) and below, house and lot, and other residential dwellings valued at Four million two hundred thousand pesos (P4,200,000.00) and below: provided, That beginning January 1, 2024 and every three (3) years thereafter, the amounts herein stated shall be adjusted to present values using the Consumer Price Index, as published by the Philippine Statistics Authority (PSA).
“x x x
“(R) Sale, importation, printing or publication of books, and any newspaper, magazine, journal, review bulletin, or any such educational reading material covered by the UNESCO Agreement on the Importation of Education, Scientific, and Cultural Materials, including the digital or electronic format thereof: provided, That the materials enumerated herein are not devoted principally to the publication of paid advertisements;
“x x x
“(AA) Sale of or importation of prescription drugs and medicines for:
“(i) Diabetes, high cholesterol, and hypertension beginning January 1, 2020; and
“(ii) Cancer, mental illness, tuberculosis, and kidney diseases beginning January 1, 2021;
“Provided, That the DOH shall issue a list of approved drugs and medicines form this purpose within sixty (60) days from the effectivity of this Act; and
“(BB) Sale or importation of the following beginning January 1, 2021 to December 31, 2023:
“(i) Capital equipment, its spare parts and raw materials, necessary for the production of personal protective equipment components such as coveralls, gown, surgical cap, surgical mask, N-95 mask, scrub suits, goggles and face shield, double or surgical gloves, dedicated shoes, and shoe covers, for COVID-19 prevention;
“(ii) All drugs, vaccines and medical devices specifically prescribed and directly used for the treatment of COVID-19; and
“(iii) Drugs for the treatment of COVID-19 approved by the Food and Drug Administration (FDA) for use in clinical trials, including raw materials directly necessary for the production of such drugs: Provided, That the Department of Trade and Industry (DTI) shall certify that such equipment, spare parts or raw materials for importation are not locally available or insufficient in quantity, or not in accordance with the quality or specification required: Provided, further, That for item (ii), within sixty (60) days from the effectivity of this Act, and every three (3) months thereafter, the Department of Health (DOH) shall issue a list of prescription drugs and medical devices covered by this provision: Provided, finally, That the exemption claimed under this Subsection shall be subject to post audit by the Bureau of Internal Revenue or the Bureau of Customs as may be applicable.
“(CC) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of Three million (P3,000,000.00).
Section 13. Section 116 of the National Internal Revenue Code of 1997, as amended, is hereby further amended to read as follows:
“SEC. 116. Tax on Persons Exempt from Value-Added Tax (VAT). - Any person whose sales or receipts are exempt under Section 109(CC) of this Code from the payment of value-added tax and who is not a VAT-registered person shall pay a tax equivalent to three percent (3%) of his gross quarterly sales or receipts: Provided, That cooperatives, shall be exempt from the three percent (3%) gross receipts tax herein imposed: Provided, further, That effective July 1, 2020 until June 30, 2023, the rates shall be one percent (1%).
Section 14. Section 204 of the National Internal Revenue Code of 1997, as amended, is hereby further amended to read as follows:
“SEC. 204. Authority of the Commissioner to Compromise, Abate, and Refund or Credit Taxes. - The Commissioner may -
“(A) x x x
“(B) x x x
“(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim or refund within two (2) years after the payment of the tax or penalty: Provided, however, That a refund filed showing an overpayment shall be considered as a written claim for credit or refund: Provided, further, That That in proper cases, the Commissioner shall grant a refund for taxes or penalties within ninety (90) days from the date of complete submission of the documents in support of the application filed: Provided, furthermore, That should the Commissioner find that the grant of refund is not proper, the Commissioner must state in writing the legal and factual basis for the denial: Provided, finally, That in case of full or partial denial of the claim for tax refund, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim, appeal the decision with the Court of tax Appeals.
x x x.
Section 15. Section 290 of the National Internal Revenue Code of 1997, as amended, is hereby further amended to read as follows:
“SEC. 290. Congressional Oversight Committee.
“A Congressional Oversight Committee, hereinafter referred to as the Committee, is herevy constituted in accordance with the provisions of this Code. The Committee shall be composed of the Chairperson of the Committee on Ways and Means of the Senate and House of Representatives and four (4) additional members from each House, to be designated by the Speaker of the House of Representatives and the Senate President, respectively.
“The Committee shall, among others, in aid of legislation:
“(1) x x x;
“(2) x x x;
“(3) x x x;
“(4) x x x; and
“(5) Review the performance of the Fiscal Incentives Review Board.
x x x.
Section 16. A new Title XIII shall be introduced in the National Internal Revenue Code of 1997, as amended, and the existing Title XIII and XIV shall re-sectioned accordingly. The new title XIII shall read as follows: