Operating a foreign-owned business in the Philippines offers various opportunities, especially when you plan to expand your business in the country. Diligent entrepreneurs, especially those who own small businesses, can find complying with tax obligations a tricky part of the operation.
Like other paperwork, filing taxes is not an easy feat. Some often get lost in their whirlwind of regulations, and keeping up with the loop is oftentimes taxing.
As the lifeblood of the Philippine economy, no one can dodge paying taxes, especially those with established businesses. If you operate a foreign-owned small business and this is your first time complying, you are likely to fall into these mistakes, which may cause significant turmoil moving forward.
To avoid this, we have gathered some common tax mistakes that foreign business owners face in the Philippines, so you may ensure full compliance with the Bureau of Internal Revenue (BIR) and other regulatory bodies in the future.
1. Skipping BIR Registration after Filing with SEC or DTI
Pitfall: A common misconception for many foreign entrepreneurs is that registering with the Securities and Exchange Commission (SEC) or the Department of Trade and Industry (DTI) is already sufficient to legally operate their business in the Philippines.
Reality: As equally important as having registered with the aforementioned agencies, BIR registration is also a must. Without legally issuing official receipts from the agency, you cannot legally transact with clients and suppliers alike. This would result in tax fines, back taxes, and worse, business closure.
What to Do: After securing SEC or DTI registration, ensure to register with the BIR to secure your business Tax Identification Number (TIN), register your accounting books, and get the authority to print the official receipts. It is essential to secure lawful operations and ensure tax compliance.
2. Neglecting the Annual Registration Renewal
Pitfall: Some businesses often neglect the annual BIR registration renewal since it is often assumed that the registration is just a one-off commitment.
Reality: Under the mandate of the BIR, it is required that the business registration be renewed on or before January 31st of each year. Failure of the taxpayer to renew the permit can lead to penalties and possible business closure.
What to Do: It may be good practice to set a reminder for the completion of the renewal process to avoid missing the deadline, to remain in good standing with the BIR.
3. VAT Rules and Zero-Rating Misinterpretation
Pitfall: As they understood it, if they are tagged as a foreign business in the country, they are VAT-exempt or zero-rated, especially when they deal with foreign or international clients.
Reality: As of June 2, 2025, the Philippines now imposes a 12% VAT on digital services, which has been in effect since.
What to Do: For foreign businesses that are Digital Service Providers (DSPs) in the country, it’s best to consult with a tax advisor to determine the correct VAT for these transactions, as well as the appropriate invoices and filing VAT returns, since the regulation on digital services is fairly new. To know more about this regulation, you may visit the VAT on Digital Services in the Philippines article.
4. Overlooking Withholding Tax
Pitfall: Some foreign businesses often overlook their role as withholding agents for payments to non-resident foreign corporations (NRFCs).
Reality: BIR requires withholding taxes on some payments to NRFCs, including but not limited to technical fees, royalty fees, among others. If this is not complied with, it will result in penalties as well as interest charges.
What to Do: Ensure timely remittance of withheld taxes to BIR to avoid penalties from happening. Familiarizing oneself with the withholding tax rates and requirements for NRFC payments is also essential.
5. Book of Accounts Deficiency
Pitfall: Improper bookkeeping would result in inconsistencies and differences in terms of tax filings and financial reporting.
Reality: Since the records shall be registered with the BIR, the books must be accurately maintained, and books of accounts shall also be updated, including the journals and ledgers, as required.
What to Do: Hiring a professional bookkeeper would be helpful to manage the books entirely. To ensure further compliance, implementing an accounting system would also be helpful in ensuring accuracy and compliance.
6. Ignoring the Relevance of Tax Incentives
Pitfall: Tax incentives are not fully utilized by the businesses, which may lead to cost-saving lost opportunities.
Reality: The government is continuously going its way to provide relevant tax incentives to encourage foreign investments in the country, such as income tax holidays, PEZA incentives, CREATE MORE Act incentives, to name a few.
What to Do: Research and identify the applicable tax incentives for the business. To benefit from these incentives, compliance is always a must. You may also visit the PEZA website or read the CREATE MORE Act to take advantage of these incentives.
7. Error in Applying Tax Treaty Benefits
Pitfall: If foreign businesses are not aware of tax treaties between the Philippines and their resident country, it could lead to hefty tax liabilities.
Reality: Unbeknownst to many, the Philippines has tax treaties involving several countries. This is to avoid double taxation and help the business economy reduce withholding tax rates.
What to Do: You may research whether your resident country is included in the list of tax treaties with the Philippines. This would essentially help reduce withholding tax liabilities or exceptions in terms of dividends, interest, as well as royalties. To enjoy these benefits, you may file the necessary form or BIR Form 0901 (Application for Treaty Purposes), and other necessary documents in advance for the payment of income. With these cases, working with a legal or tax advisory firm is a must for you to be assisted with cross-border tax planning.
8. Confusion in using the Right Tax Forms
Pitfall: One of the common mistakes is using the wrong tax form when filing taxes. Some forms are inarguably confusing, especially when you first encounter them.
Reality: The BIR has a list of forms on their website, explaining the usage of each, and is readily available to download for easy reference and filing.
What to Do: To avoid confusion, ensure to check the BIR website for any updates. You may also visit eBIR Forms or eFPS for the electronic filing and payment system, or consult a professional to ensure that you are using and filing the correct forms.
9. Misidentifying the Employees and Contractors
Pitfall: It would lead to incorrect tax filings and penalties in terms of misclassification of workers.
Reality: Accurate distinction between employees and independent contractors is essential since they have different tax obligations. The BIR requires that it be correctly classified so the right taxes may be imposed.
What to Do: The nature of the working relationships shall be clearly defined. To help with accurate reporting and compliance, a tax professional can also help.
10. Frequent Incorrect Tax Filing
Pitfall: Some common mistakes of foreign business owners are to assume that filing annual taxes is already enough, which tends to overlook the monthly and quarterly obligations.
Reality: Different taxes have different filing schedules. For instance, the Value Added Tax (VAT) shall be filed monthly and quarterly; for Withholding Taxes, it shall be reported monthly, and; Income Tax shall be filed both quarterly and annually.
What to Do: To make sure you won’t miss a thing, make a calendar listing of all the deadlines of these relevant tax filings. To help you align with the filing frequencies, regular consultations with a licensed CPA or professional would be beneficial.
Outsmarting these Tax Pitfalls
Foreign business ownership in the Philippines is indeed a tricky venture, in the sense that there are tax laws that they need to comply with in the Philippines, which are different from or are not practiced in their own country. The tax landscape of our country is dynamic, complex, and usually requires local expertise to navigate.
Foreign businesses often operate remotely or through representatives who are not well-versed in the Philippine tax laws, which leads to a margin of error. It’s not a surprise since the tax law is detailed and is subject to frequent amendments or updates.
If you plan to enter the market or have been keen to expand your operations in the Philippines, the key to success lies in proactively complying with tax laws and regulations set forth by the government. With effective documentation and consultations with professionals who are well-versed in local tax frameworks, it would make tax compliance in the Philippines a walk in the park.
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Our team from Manila Bookkeepers will help you in keeping your business compliant, while avoiding wreaking havoc on your business venture. Don’t let tax pitfalls harm your business’ growth or eventually drain your flow of resources.
With our roster of certified tax experts, let us lead you into being proactive with these regulations; while helping you traverse through the maze of these local taxes. We can help you stay on top while complying with government agencies such as the BIR, SEC, and LGUs (Local Government Units).
Do your business, and we’ll do the rest. Contact us today!
If you want to know more, visit How Tax Penalties Can Affect Your Business.
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