Brief Guide to Taxation in the Philippines

Foreign-owned companies that want to do business in the Philippines need to comply with the country’s tax laws and regulations. Non-compliance with these will lead to penalties. Knowing about taxation in the Philippines improves your compliance and makes sure you meet all the requirements and deadlines. Taxation in the Philippines follows a territorial tax system. This means that only income generated in the country is subject to taxes.

These are the taxes you need to pay while doing business in the Philippines.

Corporate Income Tax

The passing of the CREATE Act led to the reduction in the corporate income tax (CIT) rate. From 30% regular corporate income tax, domestic corporations are now taxed at 20% or 25%, while foreign corporations are taxed at 25%. Domestic micro, small, and medium-sized businesses will have a preferential rate of 20%. This benefit is for companies with taxable income of up to P5 million but doesn’t exceed P100 million. A 25% CIT rate is excised on net income from all sources. Companies that aren’t residents get taxed on the income derived from the Philippines. Domestic companies pay taxes on the income they generate worldwide.

Minimum Corporate Income Tax

An annual MCIT or minimum corporate income tax of 2% is levied on resident foreign and domestic corporations. Companies incur this tax from the start of the fourth taxable year following the initiation of operations. The MCIT is enforced when the 20% CIT is lower compared to the 2% MCIT on a corporation’s gross income. Any exceeding amount of the MCIT past the normal tax may be carried over and credited against the normal tax for the three subsequent taxable years.

Withholding Tax

Taxation in the Philippines also includes withholding tax.

• Dividends – A 25% withholding tax is imposed on dividends that a resident company disburses. A tax of 15% is levied on dividends allocated to non-residents provided that the non-resident’s country allows a 15% tax credit. A deduction on the withholding tax is possible if an applicable tax treaty is in place.  
• Interest – A 20% withholding tax is imposed on interest paid to a non-resident. An exception applies when a tax treaty is in place.
• Royalty – A final withholding tax of 20% is levied on royalty payments given to a resident or domestic company. A 25% withholding tax is enforced on a non-resident’s royalty payments.

Fringe Benefits Tax

Tax regulations define fringe benefits as services, goods, or other benefits given in cash or kind outside of basic compensation that an employer provides to employees. Such benefits provided to managerial and supervisory employees incur a 35% tax on its gross monetary value. An exception on fringe benefits tax applies when these are deemed essential to the nature of a company.

Fringe benefits include but are not limited to the following:

• Expense accounts
• Household personnel
• Club membership fees
• Housing
• Vacation expenses
• Education assistance
• Interest on loans below market rate
• Foreign travel expenses
• Non-life insurance premiums
• Life or health insurance

Branch Profit Remittance Tax

Foreign companies in the Philippines are subject to a 30% income tax rate of the income they generate within the country. An exception applies if they’re registered with the Philippine Economic Zone Authority. A 15% BPRT or branch profit remittance tax is enforced on a branch’s after-tax profits. The after-tax profits that a branch remit excludes items not connected with its operations in the country. These income items include:

• Salaries
• Remuneration for technical services
• Interests
• Royalties
• Rents
• Dividends
• Premiums
• Annuities

It also includes emoluments, casual gains, capital gains, profits, and others received during each year as long as the sources are from the Philippines.

Personal Income Tax

Taxation in the Philippines includes a personal income tax that follows a progressive rate of 0% to 35%. The TRAIN Act introduced provisions that reduce personal income tax for each bracket.

Value-Added Tax

Taxation in the Philippines includes a 12% VAT or value-added tax the government enforces on goods and services that generate a gross sale of more than P3 million. The Philippines applies an exception Revenue Regulations (RR) No. 21-2021 for registered exporters when they locally purchase goods and services. This privilege includes the sale of goods, equipment, packaging materials, supplies and others for up to 17 years.

VAT exemptions apply for the following:

1. Services, this includes providing basic infrastructure, repair, utilities, and maintenance of equipment delivered to a registered company;
2. Raw and packaging materials, inventories, supplies, and goods sold to a registered company and used in its registered operations;
3. Sales to entities or individuals who have an exemption from direct and indirect taxes included in special international agreements wherein one of the signatories is the Philippines;
4. Services provided to individuals engaged in international shipping operations or air transport. This includes leases of property as long as these services are used for international shipping operations or air transport;
5. An exemption is applied for processing, manufacturing, or repacking of goods for individuals or entities that are doing business outside of the Philippines. The said goods must also be exported and paid using foreign currency;
6. The exception includes transport of cargo and passengers using domestic air or sea vessels from the Philippines to a foreign country; and
7. The sale of energy is created through renewable resources like solar, hydropower, biomass geothermal, steam, and wind among others.

A registered export enterprise is a:

• Corporation
• Partnership
• Entity established under Philippine Laws
• Registered with an IPA or Investment Promotion Agency

They must also conduct activities such as:

• Assembling
• Processing operations
• Manufacturing

They must also export processed or manufactured goods.

The CREATE Act stipulates that newly registered export enterprises can benefit from VAT exemptions for up to 17 years maximum from the date of their registration. On the other hand, existing registered export businesses with addresses within the freeport ecozones and zones are exempt from paying VAT until the end of the transition period.Your company needs to comply with taxation in the Philippines.

You’ll need the assistance of a reliable business partner to navigate the laws and regulations. Doing so allows you to avoid penalties and fines that eat into your profits. Manila Bookkeepers is an accounting company in the Philippines that can cater to your needs.