Tax exemptions are special privileges afforded by the government that reduce or eliminate the obligation to pay certain taxes.
The standards and qualifications for exemptions are determined by the Bureau of Internal Revenue (BIR). Entities entitled to tax exemptions are then issued with a Certificate of Tax Exemption (CTE), officially recognizing their exempt status.
For those wondering how to navigate this process, understanding who qualifies and the steps required to secure a CTE is crucial.
In this blog post, we’ll explore who is exempted from tax in the Philippines, providing you with all the necessary details to understand and potentially benefit from these exemptions.
Understanding Tax Exemptions in the Philippines
Tax exemptions in the Philippines are legal ways to reduce how much tax you have to pay, letting you keep more of your income. These exemptions can make a big difference for eligible individuals by improving their financial health and freeing up money for personal needs.
There are many categories of tax exemptions available, each designed to address different financial circumstances and types of taxpayers. Understanding these categories is crucial for maximizing potential benefits and ensuring compliance with tax laws.
Philippine Tax Exemptions: Categorization & Requirements
Here’s a simplified guide outlining the key categories and requirements for these exemptions.
Categorization
Personal Income Tax Exemptions
| Minimum Wage Earners | Earners of the statutory minimum wage are exempt from income tax. These include holiday and overtime pay that does not exceed the threshold. |
| Persons with Disabilities (PWDs) | PWDs enjoy special deductions beyond the basic personal exemptions. It also includes being contingent upon meeting the Philippines’ legal definition of a Person with Disability (PWD). |
| Senior Citizens | Individuals aged 60 and above who are retired may not need to pay taxes on certain types of income, such as pensions, assuming they meet the criteria. |
| Overseas Filipino Workers (OFWs) | OFWs are generally exempt from Philippine income tax on their earnings abroad, provided they qualify as OFWs. |
| 13th Month Pay and Other Benefits | Your 13th-month pay and other benefits are exempt from tax up to ₱90,000, as part of your compensation package. |
Entity-Based Tax Exemptions
| Government-Owned or Controlled Corporations (GOCCs) | Most GOCCs enjoy a break from corporate income tax, although not all are eligible. Entities must be legally recognized as GOCCs to use this exemption. |
| Educational Institutions | Non-profit educational institutions do not pay taxes on income used directly for educational purposes, provided they are accredited by relevant government bodies. |
| Religious Organizations | The income that religious organizations earn from activities integral to their religious functions is exempt from tax. These organizations must be officially registered. |
Industry & Activity-Based Exemptions
| Cooperatives | Certain cooperatives may be exempt from the standard 12% VAT and instead pay a reduced 3% percentage tax. Eligibility requires proper registration and meeting specific operational criteria. |
| Export-Oriented Enterprises & Strategic Industries | These entities can access various incentives, including income tax holidays and special tax rates under the CREATE law, provided they engage in qualifying activities. |
| International Carriers, Dispatch, & Foreign Embassies | Exemptions from travel tax and VAT are granted based on international agreements, applicable to legally defined categories. |
Other Notable Exemptions
| Medicines for Specific Illnesses | Medications for diseases such as diabetes, hypertension, and cancer are VAT-exempt, helping reduce the financial burden on those affected by these conditions. |
| Affordable Housing | Selected housing under certain price brackets was VAT-exempt until 2020, promoting more affordable living options. |
| Charitable Contributions | Donations to accredited institutions are exempt from donor’s tax and limited to 30% of administrative expenses. |
Tax Exemption Requirements
1. Scholarship and Job/Livelihood Programs
For individuals applying under these programs, the Bureau of Internal Revenue (BIR) mandates the following documents:
Income Verification:
- Certificate of Low Income or No Income, signed by the Barangay Chairman.
- Notarized Affidavit of Low Income or No Income.
Payment Proofs:
- Receipts for PHP 100 Certification Fee and PHP 30 for Documentary Stamp Tax.
For Representative Transactions:
- Special Power of Attorney for the authorized representative.
- Government-issued ID of the representative.
2. Cooperatives
Cooperatives must adhere to the guidelines set out in BIR’s Revenue Memorandum Circular No. 76-2022, which include:
For New Applications:
- Articles of Cooperation and By-Laws, certified by the CDA.
- New and current Certificates of Registration and Good Standing from the CDA.
- BIR Certificate of Registration and a certified member list with TINs and contributions.
For Renewal:
- Updated Articles of Cooperation and By-Laws, and Certificate of Registration.
- A BIR-accredited accountant made the latest audited financial statements.
3. Non-Stock, Nonprofit Educational Institutions
Educational institutions must comply with the requirements of BIR Revenue Memorandum Order No. 44-2016:
Application Essentials:
- Application letter for Tax Exemption Ruling.
- Certificate of Good Standing from the SEC.
- Treasurer’s Oath regarding income and compensation details.
Operational Proofs:
- Financial Statements for the last three years.
- Valid government recognition or permit from CHED, DepEd, or TESDA.
- Current Certificate of Operation or Good Standing, if applicable.
- Certificate of Utilization of Revenues and Assets.
4. Non-Stock, Nonprofit Corporations
These entities should follow the stipulations of BIR’s Revenue Memorandum Order No. 38-2019:
Initial Submission:
- Application letter specifying the exemption sought under NIRC Section 30.
- Latest Articles of Incorporation and By-Laws from the SEC.
Operational and Financial Details:
- Executive officer’s Oath about the corporation’s activities, income sources, and use of revenues.
- RDO Certification confirming the corporation’s tax compliance and investigation status.
Financial Records:
Income Tax Returns or Annual Information Returns and Financial Statements for the past three years.
By preparing these documents in advance and ensuring they meet the specific criteria, you can facilitate a smoother application process for your Certificate of Tax Exemption.
If time is tight and gathering paperwork feels overwhelming, consider leveraging tax services that provide personalized consultation and reminders. These services not only help you prepare efficiently but also save you valuable time and money.
FAQs
Who are qualified dependents for tax exemption in the Philippines?
Qualified dependents include unmarried and unemployed children under 21 years, disabled children of any age, and dependent parents. These dependents must not have any income themselves to qualify for exemptions.
What salary is tax-free in the Philippines?
Salaries up to ₱250,000 per annum are exempt from income tax according to the TRAIN law. This exemption aims to reduce the tax burden on lower-income earners.
Do remote workers for foreign companies without offices in the Philippines need to pay taxes?
Yes, remote workers residing in the Philippines who work for foreign companies must pay taxes on their global income. This applies if they are in the Philippines for more than 180 days a year.
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