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Tax Compliance

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

  • Tax compliance in the Philippines is a complex process requiring accurate and up-to-date record-keeping.
  • Foreign businesses can enjoy tax incentives, holidays, and exemptions for qualified activities.
  • BIR (Bureau of Internal Revenue) registration and certification from the Securities and Exchange Commission are required for foreign firms doing business in the Philippines to enforce its rights before any Philippine court, such as availing judicial remedies against erroneous or illegal tax assessments.
  • Partnering with local tax experts can ensure compliance, optimize tax strategies, and help businesses maximize available incentives.

The Philippines offers a highly foreign business-friendly tax system, following the territoriality principle — meaning foreign corporations are taxed only on income earned within the country.  

The country also operates on a pay-as-you-file system, with taxes due upon filing. Additionally, eligible businesses can benefit from various incentives and tax exemptions, making it an attractive destination for foreign enterprises. 

This article provides a comprehensive overview of Philippine tax laws and explores how partnering with local tax experts can help your business thrive by reducing risks and ensuring full compliance.

An Overview of Philippine Tax Laws 

Understanding key Philippine tax laws is crucial for individuals and businesses to ensure compliance and take advantage of available incentives. Below is a list of important regulations, ranging from constitutional provisions to recent reforms aimed at simplifying compliance and promoting fairness. 

Registration Requirements for Foreign Businesses 

As one of the fastest-growing economies in Southeast Asia, the Philippines offers numerous opportunities for foreign investors. However, before you can start operating in the country, it is essential to register first (McKinsey & Company, 2024).

Here is the step-by-step guide: 

Step 1: Choose Your Business Structure 

Your tax liability depends on your business structure. For example, a branch office is subject to income tax, while a representative office is not. Additionally, Regional Headquarters (RHQs) and Regional Operating Headquarters (ROHQs) have distinct tax obligations. It’s important to choose the correct entity type for your business to ensure compliance with the applicable tax regulations (The Lawphil Project, n.d.). 

You may also incorporate as a domestic corporation, subject to the capitalization requirement under the law (Boards of Investment, 2024). 

Related Article: The Foreign Company’s Guide to Business Setup in the Philippines 

Step 2: Register with the Securities and Exchange Commission (SEC) 

Registering with the SEC grants you the privilege to do business in the Philippines and to enforce your corporate rights in a Philippine court. An SEC license is also required for BIR registration. 

Step 3: Secure a Tax Identification Number (TIN) from BIR 

This can be done electronically through the BIR Online Registration and Update System (ORUS). Your business’ TIN will be used in all tax-related transactions and reporting. 

Step 4: Obtain a Mayor’s Permit and Business License 

You also need to obtain a Mayor’s Permit from the locality where your business will operate and this requires payment of local taxes, fees and charges (First Circle, 2023). 

Step 5: Register with other government agencies 

You also need to register with other government agencies like PhilHealth, Pag-IBIG, and Social Security System (SSS) for employee benefits. 

Step 6: Register with Philippine Economic Zone Authority (PEZA) or with the Board of Investment (BOI) for incentives. 

If your business qualifies, register with PEZA or BOI to take advantage of income tax holidays (ITH), exemptions and other incentives.  

Step 7: Open a Corporate Bank Account 

You will need a bank to transact, and the bank will ask for your SEC and BIR registrations, as well as your article of incorporation, by-laws, and board certificate. 

Step 8: Secure Additional Permits 

Depending on the nature of your business, you will need to secure additional permits, such as an Environmental Compliance Certificate for those engaged in mining activities and other undertakings that may impact on the environment. 

Step 9: Comply With Periodic Reporting Requirements 

The SEC requires periodic submission of documents like the General Information Sheet (GIS) and Audited Financial Statements (AFS). Regular tax filings every month, quarter and annually are mandatory to avoid penalties imposed by the BIR. 

Tax Obligations for Foreign Businesses in the Philippines: Key Taxes and Regulations 

Foreign businesses are subject to the following taxes: 

Corporate Income Tax (CIT) 

Resident foreign corporations (RFCs) operating through branch offices in the Philippines are taxed only on Philippine-sourced income, similar to domestic corporations. Certain FCDU transactions and regional headquarters of multinational corporations are exempt. 

Non-resident foreign corporations (NRFCs) are taxed on their Philippine-sourced income, with a general rate of 25%. 

Minimum Corporate Income Tax (MCIT) 

If the regular CIT is less than 2% of a resident foreign corporation’s gross income, the 2% MCIT will apply. Any amount paid more than the regular tax can be carried forward and credited against CIT in the next three years. 

Withholding Tax 

Withholding tax is not a tax per se but a system of tax administration where the resident foreign corporation shall deduct tax at income source for remittance to the BIR. Dividends issued to a resident are subject to the withholding tax of 25% and 15% for a non-resident. Interest paid to a non-resident is subject to 20% tax, unless a tax treaty provides for a lower rate. 

Fringe Benefits Tax 

Fringe benefits are those given to supervisory or managerial employees, either in cash or in kind, other than their compensation and are subject to 35% tax on the grossed-up monetary value of the benefit. If given to a rank-and-file employee, the benefits are not taxable up to a certain amount as provided by law. 

Branch Profit Remittance Tax 

Branch profits are taxed in the same way as corporate profits. Branch profits remitted abroad are taxed at 15%. Qualified activities of branches registered with the PEZA, however, are tax-exempt. 

Value-Added Tax (VAT) 

A 12% VAT applies to sales of services and imports, as well as to the sale, barter, exchange, or lease of goods or properties. Export sales by VAT-registered persons are zero-rated.

Capital Gains Tax (CGT) 

A 6% final tax is imposed on the higher of the gross selling price or fair market value upon the sale, exchange, or disposition of land or buildings not actually used in the business of a corporation. 

Local Taxes 

All corporations, including foreign-owned ones, are subject to local business tax, transfer tax, and specific fees and charges. The rates vary depending on the local government unit (LGU) where they operate.

Navigating PEZA and BOI Tax Incentives 

PEZA-registered foreign corporations enjoy tax incentives, holidays and exemptions as long as they locate their business within a Special Economic Zone (SEZ), which is a highly developed area or which has the potential to be developed into agro-industrial, Industrial tourist/recreational, commercial, banking, investment and financial centers. Incentives provided by PEZA include: 

  1. For Export-oriented Enterprises: Income Tax Holiday (ITH) of 4-7 years and availment of Special Corporate Income Tax (SCIT) rate of 5% or Enhanced Deductions (ED) for 10 years 
  2. For Domestic Market Enterprises: Income Tax Holiday (ITH) of 4-7 years and availment of Enhanced Deductions (ED) for 5 years. 

On the other hand, companies that register with the BOI are entitled to various fiscal and non-fiscal incentives, including but not limited to the following benefits:

  • Income tax holidays for 3 to 8 years
  • Exemption from local business taxes for a 4 to 6 year period
  • Simplified employment procedures for foreign nationals and expatriates
  • Exemption from wharf dues, export taxes, duties, and fees
  • Tax credits on imported raw materials
  • Tax exemptions on breeding stocks and agricultural produce

Related Article: What Are the Benefits of Peza Accreditation? 

Avoiding Double Taxation: Key Treaties and Processes 

Because multinational companies operate in various countries, it is possible that the same subject matter is taxed twice by different jurisdictions. Double taxation is costly for foreign businesses and to prevent this, the Philippines has entered into double taxation treaties (DAT) with 43 countries (PwC Philippines, 2024).  

Double taxation is resolved through a Mutual Agreement Procedure (MAP), which is a provision in DAT that allows the competent authorities from contracting parties to resolve disputes and ambiguities in the interpretation of a tax treaty.  

If a taxpayer thinks that it would be subject to double taxation, it can make a formal request to acquire a MAP assistance by filing said request to the Chief of Internal Tax Affairs Decision (ITAD) of BIR and attaching the necessary supporting documents. 

Administrative Compliance: Filing, EOPT Act, Penalties, and Legal Remedies 

Understanding tax compliance in the Philippines requires knowledge of filing requirements, the changes introduced by the EOPT Act, the penalties for non-filing or failure to file returns, and the administrative and judicial remedies available in case of disputes. 

Filing 

Resident foreign corporations need to file a cumulative income tax return on a quarterly basis or within 60 days from the close of each quarter. A final annual income tax return must be filed on or before the 15th day of the fourth month following the close of the taxable year.  

Corporations must compute their income and file their return based on an accounting period of 12 months, which may or may not be the calendar year. Corporate taxpayers file self-assessed returns, which can be done electronically. 

The Securities Regulation Code (SRC) Rule 68 provides the guidelines for statutory financial reports required from the following entities:

  1. Stock corporations with paid-up capital stock of P50,000.00 or more
  2. Non-stock corporations with total assets of P500,000.00 or more, or gross annual receipts of P100,000.00 or more
  3. Branch offices of stock foreign corporations with assigned capital equivalent to P1,000,000.00 or more
  4. Branch offices of non-stock foreign corporations with total assets equivalent to P1,000,000.00 or more
  5. Regional operating headquarters of foreign corporations with total revenues equivalent to P1,000,000.00 or more.

For transfer pricing, the corporate taxpayer must demonstrate that the sale or transfer was done according to the arm’s length principle. Corporations enjoying tax incentives and transacting with domestic and foreign related parties in the covered taxable year must file BIR Form 1709 (Related Party Transactions Form).   

The EOPT Act 

The passage of the EOPT Act addresses bureaucratic red tape and other concerns of investors on local tax compliance. The law now allows electronic filing of tax returns and tax payments to the BIR, or through any authorized agent bank (AAB) or authorized tax software provider.  

Previously, returns should be filed with the revenue district office (RDO) where the taxpayer is registered, and taxes paid in AABs within the area of jurisdiction of the RDO where the taxpayer is registered. This provision effectively removed the 25% surcharge on improper filing. The law also provides that the obligation to withhold arises at the time the income has become payable.     

Related Article: Embracing Digital Tax Filing in the Philippines: What You Need to Know 


Penalties for Late Filing or Failure to Pay 

Under the Philippine tax system, time is of the essence. For failure to file any return or pay the tax due, the taxpayer shall pay, in addition to the tax due, a 25% surcharge based on the amount due.  

A higher surcharge of 50% shall be imposed in case fraud was employed to evade tax liabilities. Interest shall also be imposed on any unpaid tax and interests due. Apart from imposing civil penalties, the government may also levy or forfeit real properties to satisfy the tax obligations. 

Legal Remedies 

On BIR audits, businesses may question their assessments either administratively or judicially. They have 15 days (about 2 weeks) to dispute the assessment contained in a Preliminary Assessment Notice and 30 days to contest a Final Assessment Notice.  

If the protest is denied or not acted upon by the BIR within 180 days (about 6 months), the taxpayer may file a petition for review with the Court of Tax Appeals within 30 days from receipt of the decision or from the lapse of the 180-day period. Both administrative and judicial remedies must be undertaken within 2 years from the day of tax payment or filing of the return.  

Why Partner with Local Tax Experts? 

Local tax experts bring years of experience in preparing tax returns, accurate accounting, and interpreting tax laws. Their industry expertise helps you develop tailored tax strategies to optimize your finances. With precise accounting, meeting substantiation requirements for deductions and preparing evidence for assessments or reconsideration becomes easier. 

Manila Bookkeepers offers reliable bookkeeping, accounting and tax services for both domestic and foreign companies. We assist investors with PEZA and BOI registrations, transfer pricing and other accounting and tax-related needs, leveraging technology to make bookkeeping accurate and up-to-date. 

Ensure your business stays compliant with Philippine tax laws and maximizes available incentives.  

Contact Manila Bookkeepers today for expert tax and accounting services tailored to foreign businesses operating in the Philippines.

Frequently Asked Questions (FAQs) 

Is it true that I need to file taxes even if my business is not making a profit yet? 

Yes. Upon registration with the BIR, your business is already required to file a tax return the following month depending on your taxpayer classification, whether you have already earned a profit or not, and even if you are not yet operating.

Does paying a local business tax and income tax amount to double taxation? 

No. While both taxes are privilege taxes, they differ in terms of the purpose of taxation and the taxing authority. Local business taxes, however, can be claimed as deduction to reduce your taxable income.

If a foreign company invests in a domestic corporation, will its dividend income be taxable? 

Yes. Non-resident foreign corporations or aliens are subject to income tax for all Philippine-sourced income, including dividend income from a domestic corporation.

What happens if I fail to withhold the taxes due to my employees? 

As the withholding agent of the government, your business will be liable to pay the amount due and relevant penalties.

Is a company, which contracted consultancy works performed abroad, required to withhold a portion of the service fee for remittance to BIR? 

No. Following the territoriality principle, only services rendered within the country are taxable. 

References:

Manila Bookkeepers

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