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Executive Orders

Further Amending Certain Provisions Of The National Internal Revenue Code, As Amended

Executive Order No. 37

EXECUTIVE ORDER NO. 37 July 31, 1986

FURTHER AMENDING CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED

WHEREAS, it is necessary to rationalize the present system of taxing incomes derived by individuals and corporations to improve equity, to achieve greater administrative simplicity, to broaden the tax base and improve revenue elasticity and to provide incentives for greater resource allocation.

NOW, THEREFORE, I, CORAZON C. AQUINO, President of the Philippines, do hereby order:

Sec. 1. Section 20 of the National Internal Revenue Code, as amended, is hereby further amended by adding a new paragraph (z) to read as follows:

"(z) The term 'ordinary income' includes any gain from the sale or exchange of property which is not a capital asset or property described in Section 34 (a) Any gain from the sale or exchange of property which is treated or considered, under other provisions of this Title, as 'ordinary income' shall be treated as gain from the sale or exchange of property which is not a capital asset...

EXECUTIVE ORDER NO. 37

Amending Certain Provisions of the National Internal Revenue Code

• Definitions (Sec. 1, 20(z)):
- Defines "ordinary income" and "ordinary loss" to include gains/losses from sale of non-capital assets.

• Individual Income Tax (Sec. 2, 21):
- Provides tax rates for taxable compensation, business, and other income ranging from 0% to 35%.
- Allows married individuals to compute tax separately based on respective incomes.
- Taxes foreign source gross income of non-resident citizens at rates from 1% to 3%.
- Imposes final tax rates on certain passive incomes like interest (20%), dividends (15% in 1986, reducing to 0% by 1989), and capital gains from sale of shares (10% or 20% for non-traded shares, 0.25% for traded shares).
- Taxes capital gains from sale of real property at 5% of gross selling price or fair market value.

• Non-Resident Alien Individuals (Sec. 3, 22):
- Taxes non-resident aliens engaged in trade/business in the Philippines like resident citizens/aliens, except for capital gains from buying/selling traded shares.
- Imposes 30% tax on dividends, partnership shares, interest, royalties, prizes, and other winnings.
- Taxes capital gains from sale of shares like resident individuals.
- Provides tax rates for certain categories of non-resident alien employees.

• General Professional Partnerships (Sec. 4, 23):
- Partners are taxed individually on their distributive share of partnership income.

• Corporate Income Tax (Sec. 5, 24):
- Imposes 35% tax on taxable income of domestic corporations and partnerships.
- Provides lower rates for private educational institutions (10%) and mutual life insurance companies (10% on gross investment income).
- Taxes interest, royalties, and capital gains from sale of shares at specified rates.
- Exempts certain foreign currency transactions under the Expanded Foreign Currency Deposit System.
- Exempts intercorporate dividends received by domestic corporations.

• Foreign Corporations (Sec. 6, 25):
- Taxes resident foreign corporations at 35% on taxable income from Philippine sources.
- Provides 2.5% tax on gross Philippine billings for international carriers.
- Taxes foreign mutual life insurance companies at 10% on gross Philippine investment income.
- Exempts certain foreign currency transactions of offshore banking units.
- Taxes branch profits remitted to head office at 15% (7.5% for petroleum operations).
- Taxes interest, royalties, capital gains from sale of shares, and intercorporate dividends at specified rates.
- Taxes non-resident foreign corporations at 35% on gross Philippine income, with exceptions for certain types of income.

• Deductions (Sec. 9-11, 28-30):
- Allows deductions for ordinary and necessary business expenses, interest, taxes, losses, bad debts, depreciation, depletion, charitable contributions, and pension trusts.
- Provides optional standard deduction of 10% of gross income for individuals.
- Allows personal and additional exemptions for individuals based on filing status and number of dependents.
- Allows deduction of foreign taxes paid by non-resident citizens from foreign source income.

• Capital Gains and Losses (Sec. 12-15, 35, 37):
- Repeals certain provisions related to capital gains and losses.
- Provides rules for determining basis and amount of gain/loss from sale of property.
- Allows deduction of losses from sources within the Philippines for non-resident aliens/foreign corporations.

• Tax Returns and Payments (Sec. 16-19, 45-51):
- Specifies requirements for filing individual, corporate, and partnership tax returns.
- Allows installment payments for individuals and non-resident citizens with tax exceeding certain thresholds.
- Requires payment of capital gains tax on date of transaction or upon filing return.
- Provides for assessment and payment of deficiency tax.
- Requires withholding of tax at source for certain types of income.

• Estates and Trusts (Sec. 20, 56):
- Allows $6,000 exemption from income of estates and trusts.

• Withholding Tax on Wages (Sec. 22, 82):
- Requires employers to withhold tax on wages as per regulations.
- Allows credit for withheld tax against individual income tax liability.
- Provides for refunds and interest on excessive withholding.

• Gifts (Sec. 23, 103):
- Treats excess of fair market value over consideration for property transfers as gift, except for real property.

• Other Provisions:
- Repeals certain sections related to income tax (Sec. 21).
- Requires codification and publication of amended tax laws (Sec. 26).
- Provides effective dates for different provisions (Sec. 28).

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