Navigating Philippine Accounting and Taxation: What Every Business Should Know

• Accurate accounting helps businesses avoid cash flow problems, stay compliant with regulations, and improve financial planning.
• Accounting focuses on financial health reporting, while taxation deals with income-generating activities and ensuring proper tax payments.
• Proper accounting and compliance with tax regulations can mitigate the risk of fines and liabilities, while also helping businesses take advantage of tax incentives.
• Hiring a local accounting expert optimizes your financial position by ensuring the correct amount of taxes is remitted while maximizing tax benefits.

Accurate accounting is the backbone of any successful business. In fact, 82% of small businesses fail due to cash flow issues. When payments — whether incoming or outgoing — are missed or mismanaged, it leads to faulty cash flow projections, inaccurate financial statements, unrealistic budgets, and even excessive taxes and penalties (SCORE, 2024).

By keeping meticulous records of income and expenses, businesses can track cash flow effectively and ensure timely tax payments. Moreover, solid accounting practices help companies remain compliant with evolving regulations — a critical aspect, as 51% of businesses report difficulties in keeping up with regulatory changes (Accounting Today, 2021).

The Philippines, as a growing economy in Asia, offers various tax incentives and exemptions to attract foreign investments. For business owners and investors, understanding accounting and taxation in the Philippines is key to effectively managing your operations and positioning your business for long-term success (McKinsey & Company, 2024).

Key Differences Between Accounting and Taxation in the Philippines

While accounting and taxation are closely related, they serve different purposes within a business. Here’s a simplified comparison:

Focus

• Accounting: Involves the accurate and timely recording of financial transactions to provide a clear picture of the business’s financial health to internal and external stakeholders.
• Taxation: Focuses on income-yielding activities like the sale of goods or real estate, ensuring proper taxation of these activities.

Governing Laws and Regulations

• Accounting: Follows the Philippine Accounting Standards (PAS) and Philippine Financial Reporting Standards (PFRS), based on Generally Accepted Accounting Principles (GAAP), as established by the Accounting Standards Council (ASC).
• Taxation: Regulated by the National Internal Revenue Code (NIRC), along with special laws like the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, and revenue regulations issued by the Bureau of Internal Revenue (BIR). Tax laws often change, requiring businesses to stay updated.

Outputs

• Accounting: Produces financial statements that provide a comprehensive view of a company’s financial performance and position over a set period.
• Taxation: Results in tax returns that report income, calculate tax liabilities, and claim deductions, exemptions, or refunds. In the Philippines, taxes are self-assessed, and any discrepancies may result in a Notice of Deficiency from the BIR.

Measurement and Valuation

• Accounting: Uses historical costs for valuation and records revenue when it is earned, following accrual-based accounting.
• Taxation: Valuation may vary depending on tax laws. For smaller businesses, cash-based accounting is common, meaning revenue is recorded when actually received, while larger entities may follow the accrual method, following the latest changes under the TRAIN law.

Role of Accountants

• Accounting: Ensures that financial statements accurately reflect a company’s financial performance and position.
• Taxation: Focuses on analyzing income, calculating tax obligations, preparing tax returns, and minimizing tax liabilities within legal limits through deductions and tax planning.

Reporting Standards

• Accounting: Must adhere to GAAP or Philippine Financial Reporting Standards (PFRS), based on accrual accounting principles.
• Taxation: Follows tax laws and revenue regulations issued by the BIR.

Corporate Income Tax (CIT) and Other Taxes Businesses Need to Manage

Companies pay different types of taxes in the Philippines depending on their business structure. Understanding these taxes is essential, as it ensures compliance, improves financial planning, and supports better strategic decision-making.

Income Tax

Individual and corporate taxpayers pay income taxes for income-generating activities, such as the provision of service. Income tax for individuals depends on their income level or whether they are purely compensation earners, engaged in business, trade or profession, or mixed income earners. 

Resident foreign corporations (RFC) are taxed  at 25% similar to domestic corporations (except on capital gains on the sale of buildings not used in business, which are taxable as ordinary income) but only on Philippine-source income. Regular CIT is filed through BIR Form 1702-RT, while those subject to special or preferential rate file BIR Form 1702-MX.  

Capital Gains Tax (CGT)

When a business sells capital assets — properties not classified as ordinary assets under the NIRC — the transaction is subject to a 6% CGT (UNA Tax and Accounting Services, 2023).

For example, if a company not engaged in real estate sells its land, the sale is subject to CGT. However, if the company is engaged in the real estate business, the land is considered an ordinary asset and is exempt from CGT.

In the Philippines, capital gains tax is filed using BIR Form 1706, and the filing must occur within 30 days of the transaction that resulted in the capital gain.

Documentary Stamp Tax (DST)

Documents evidencing the sale, transfer, or acceptance of property or obligations are subject to DST to be legally enforceable. This includes deeds of sale, contracts of lease, and other similar documents.

Value-Added Tax (VAT)

The sale of goods or services is generally subject to a 12% VAT. Manufacturers or service providers shift this tax burden to consumers as part of the purchase price. Some businesses may qualify for VAT-exempt status if they fall within SEC 109. VAT is filed quarterly (BIR Form 2550Q) .

Percentage Tax

When a business or transaction is VAT-registered, they are usually subject to percentage tax. The 3% percentage tax is imposed on the gross sales or receipts of a business or professional practice and is filed quarterly through BIR Form 2551Q.

Excise Taxes

Excise tax is imposed on imported goods, luxury goods, and goods produced for domestic consumption such as the following:

• Alcohol
• Sweetened beverages
• Tobacco
• Oil
• Automobile
• Mineral

There are different forms to be filed depending on the product subject to excise tax.

Fringe Benefits Tax (FBT)

As additional benefits to managerial or supervisory employees, companies provide additional compensation such as housing, vehicle, and expenses for foreign travel. However, these benefits are subject to a 35% FBT based on the grossed-up monetary value of the benefit, which is filed quarterly through BIR Form 1603Q.

Withholding Tax

• Final Withholding Tax (FWT): A tax withheld on certain types of passive income such as dividends and interest, typically applied to nonresident foreign corporations and individuals; the withheld amount is considered the final tax liability.
• Expanded Withholding Tax (EWT): A tax on income payments that serves as an advance credit against the payee’s income tax due, applicable to various transactions like professional fees, rentals, and certain services.
• Withholding taxes on compensation: Employers also act as withholding agents of the government for purposes of efficient tax collection. Companies deduct a certain percentage to their employees’ income based on their tax bracket and remit the amount to the BIR through BIR Form 1601-C. Failure to withhold will make the company liable for the tax due.
  

Local Taxes

Local governments also impose local business taxes, franchise tax, and entertainment tax, subject to exemptions under the Local Government Code. In Manila and other cities within Metro Manila, real properties are subject to a 2% real property tax based on the property’s assessed value (Tax and Accounting Center, Inc., n.d.)

Businesses engaged in common carriage and pipeline operation are exempt from common carrier tax since they are already subject to a national 3% percentage tax (Inquirer, 2015).

Related Article: Ensuring Tax Compliance in the Philippines: Essential Guide for Foreign Investors

Impact of Accounting on Tax Liabilities

Accounting is essential for determining a business’s tax liabilities. Expert accountants can legally minimize tax exposure through tax avoidance, reducing business costs.

Tax Deductions and Credit

By tracking expenses and keeping receipts, a business can claim deductions, which reduce the taxable income, or credits, which lower the tax owed.

Example: Suppose a company earned ₱20 million in 2023 and donated ₱500,000 to a BIR-accredited non-government organization (NGO). This charitable contribution is 100% deductible, which means the company’s taxable income becomes ₱19.5 million. 

At a 25% CIT rate, the company will only pay ₱4.875 million in taxes, as opposed to ₱5 million before the contribution. The deed of donation will serve as proof of the expense deductibility.

Depreciation

Depreciation is an accounting method that spreads the cost of an asset over its useful life and it is tax deductible under Section 34 of the NIRC.

Example: If a company bought machinery for ₱1 million with a five-year economic life and adopted the straight-line depreciation method, which spreads costs evenly throughout the useful life, it can claim ₱200,000 as deduction every year for five years. 

If the company’s taxable income for the fiscal year is ₱4 million, accounting for depreciation will lower the taxable income to ₱3.8 million and the tax due from ₱1 million to ₱950,000.

Revenue Recognition

In accrual basis accounting, revenue is recorded when it is earned. 

For Philippine taxation, although it is transitioning to an accrual basis, the receipt of cash for services to be provided in the future may still be declared in the period the cash was received, especially if the seller of the service has already issued a BIR-registered invoice. This would result in a Deferred Tax Asset (DTA) due to the tax being paid in advance (timing difference).

10 Tips to Breeze Through Accounting and Taxation in the Philippines

As business owners and investors, your primary goal is to boost profits while keeping costs low. Since taxes are a major operational expense, accurate accounting is crucial for timely filings, payments, and utilizing available tax benefits.

Follow these tips to effectively manage accounting and tax regulations in the Philippines.

1.  Know your business

Business structure and the nature of business determine tax liabilities. Those engaged in manufacturing goods considered to be harmful to public health and morality, such as alcohol and cigarettes, are subject to excise tax (PortCalls Asia, 2024). 

On the other hand, exporters and those which sell to entities registered with PEZA and other economic zones are either VAT-exempt or subject to zero rating. Economic zones are considered foreign territories for taxation purposes. 

Structure your business and plan your product or service offerings with the applicable tax laws in mind.

2. Understand local tax laws

Unlike in general accounting where the guidelines are relatively stable, tax laws in the Philippines are constantly changing. For example, those who will register with BIR from April 27, 2024 onwards now need to declare in their application their classification based on the expected gross sales (micro, small, medium or large taxpayers). 

Pay close attention to these BIR issuances or new tax laws or exemptions passed by Congress.

3. Register your business

Registration provides legal existence to your business, which entitles you to the rights and privileges under Philippine tax laws. It also enables you to transact with other registered businesses, offering greater assurance of the legitimacy of the activities conducted. Additionally, registration allows your business expenditures to qualify as deductible expenses for tax purposes.

4. Maintain accurate records and adopt appropriate accounting methods

Under Section 34 of the NIRC, claims for deductions should be substantiated. This means that the taxpayer should be armed with receipts, invoices, and other documents proving the transactions that involve a deductible expense. 

5. Take advantage of incentives

Your business can enjoy tax holidays and exemptions by registering with the Philippine Economic Zone Authority (PEZA) or pursuing businesses that the Board of Investment (BOI) considers as a pioneering activity. Pioneer firms are given an income tax holiday of six years and four years for non-pioneers. 

Related Article: The Investor’s Guide to Philippines’ Special Economic Zones: Opportunities and Advantages

6. File tax returns on time

Corporate taxpayers file tax returns quarterly (within 60 days from the close of each quarter) and annually (on or before the 15th day of the fourth month following the close of the taxable year). Late filing subjects the taxpayer to a 25 or 50% surcharge and compromise tax penalty, in addition to interest. 

7. Regularly reconcile accounts

Comparing internal records with external accounts, such as bank statements, helps identify discrepancies. Accurate financial records lead to reliable tax filings, preventing underpayment or overpayment of taxes.

8. Consider automation

Repetitive tasks like recording entries take so much time and energy and are susceptible to the risk of human error. Automated systems can be programmed to apply accounting rules consistently across all transactions, reducing the risk of inconsistencies and ensuring compliance with accounting standards. Ashraf (2024) found that firms which adopted automation are 61.8% less likely to experience a material weakness in internal control over financial reporting.  

Related Article: Taxes Made Less Taxing: Digital Bookkeeping and Its Benefits

9. Stay connected with BIR

Ensure that your accountants or in-house counsel attend BIR workshops and seminars to be familiar with new revenue regulations relevant to your line of business. If you think your tax assessment is incorrect, you can also request a ruling from the agency. By issuing a ruling, the BIR interprets a tax law or revenue regulation but this opinion only binds the taxpayer who requested it.

10. Hire a local expert

The Philippines’ tax system, such as the rules on VAT exemptions, corporate tax structure and reporting requirements, may be different from your business’ home country. Hiring a local expert bridges this gap. These experts are familiar with the usual audit triggers to ensure your records are up-to-date, minimizing the risk of disputes and penalties.

Why Partner with a Local Accounting and Bookkeeping Expert?

Hiring local experts brings a deep understanding of the local market and tax regulations to your business, ensuring accurate financial reporting and compliance with local laws. 

Manila Bookkeepers is a leading accounting, bookkeeping and tax service provider in the Philippines. Our expert accountants and cloud-based bookkeeping will ensure that your records will be accurate and up-to-date. 

Contact Manila Bookkeepers today and let us take care of the numbers and your taxes, so you can focus on growing your business.   

Frequently Asked Questions (FAQs)

• What are the basic types of books of account required by BIR?
  BIR requires the following:
  • General Journal – a chronological record of all business transactions
  • General Ledger – detailed account for all items in the financial statements
  • Cash Receipt Journal – a record of all cash inflows
  • Cash Disbursement Journal – a record of all cash outflows, such as expenses
  • Sales Journal – a record of the details of all credit sales
  • Purchase Journal – a record of the details of all credit purchases, such as supplier’s name and invoice date
    
• How often should books of accounts be updated and registered in the Philippines?
  Books of accounts should be registered with the BIR upon business operation and should be updated regularly, usually on a monthly basis for purposes of management reports  and tax filing compliance.
  
• When is an external audit required for a company in the Philippines?
  Under the Tax Reform for Acceleration and Inclusion (TRAIN) Law, companies with gross annual sales exceeding ₱3 million are required to undergo an annual audit as per BIR regulations. However, for SEC-registered entities, the threshold varies depending on the type of entity, as outlined in the amended SRC Rule 68. Therefore, the audit requirement is based on a combination of both BIR and SEC thresholds.
  
• What is the difference between a financial audit and a tax audit in the Philippines?
  A financial audit evaluates the accuracy of financial statements and is performed by external auditors, while a tax audit is conducted by BIR to verify the accuracy of tax returns.
  
• What are the deadlines for filing financial statements in the Philippines?
  The annual financial statement should be submitted to the Securities and Exchange Commission (SEC) within 120 calendar days after the end of fiscal year. For companies with a fiscal year ending on December 31 (calendar year), the deadline for submission to the SEC will depend on the last digit of the company’s SEC registration number.

For tax purposes, the audited financial statement must be attached with the Annual Income Tax Return filed by the 15th day of the fourth month after the company’s financial year-end date.

References:

• Ashraf, M. (2024). Does Automation Improve Financial Reporting? Evidence from Internal Controls. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4709274
• Canto, J., Renz, F., & Villanueva, V. (2024). The Philippines economy in 2024: Stronger for longer?. Retrieved from https://www.mckinsey.com/ph/our-insights/the-philippines-economy-in-2024-stronger-for-longer
• Chan Robles Virtual Law Library. (n.d.). National Internal Revenue Code of 1997 – Chan Robles & Associates Law Firm.Retrieved from https://chanrobles.com/legal6title18.htm#google_vignette
• Hood, D. (2021). The Year Ahead: 2022 in numbers. Retrieved from https://www.accountingtoday.com/list/the-year-ahead-2022-in-numbers
• PortCalls Asia. (2024). BOC implements updated excise taxes for alcohol, tobacco, cigarettes. Retrieved from https://portcalls.com/boc-implements-updated-excise-taxes-for-alcohol-tobacco-cigarettes/
• Sutter, B. (2024). The #1 Reason Small Businesses Fail and How to Avoid It. SCORE. Retrieved from https://www.score.org/resource/blog-post/1-reason-small-businesses-fail-and-how-avoid-it
• Tax and Accounting Center Philippines. (n.d.). Features of Real Property Taxation in the Philippines. Retrieved from https://taxacctgcenter.ph/features-of-real-property-taxation-in-the-philippines/
• Torres-Tupaz, T. (2015). Transportation and common carriers exempt from local tax, says SC. Inquirer.net. Retrieved from https://business.inquirer.net/186990/transportation-and-common-carriers-exempt-from-local-tax-says-sc
• UNA Tax and Accounting Services. (2023). The Differences Between Ordinary Assets & Capital Assets. https://una-acctg.com/the-differences-between-ordinary-assets-capital-assets/