When running a business, management of your finances should always be one of your high priority tasks. Here, your accounting team holds a significant responsibility as the data they generate should enable management to understand the long-term future and opportunities for the business.
However, since not all organizations and business models follow the same path, there may be different facets to the accounting function that needs to be given more care, focus and attention than others.
Tax accounting is often one of the most crucial yet challenging elements connected to the financial management of your business. It can be challenging to keep up with new tax regulations and other changes in the legislation while at the same time trying to stay on top of current accounting and finance trends. The tax compliance framework in the Philippines can be quite complex in certain areas, and as such, it requires ongoing scrutiny and attention from your company’s accountants and bookkeepers.
Regardless, as a founder, business owner or senior management representative, you should always make an effort to understand how the relevant tax systems work and how they impact your business in order to avoid making major mistakes with your finance and compliance activities.
Learn more about tax accounting in the Philippines and why it is a crucial element of your company’s finance management function below.
What is Tax Accounting?
In short, tax accounting is the focus on business transactions that incur taxes within a company’s jurisdiction and the application, treatment, management and ultimate filing of such applicable taxes.
Tax accounting also relates to internal finance policies used to generate the tax liabilities arising from your company’s accounting records. Compared to financial accounting, tax accounting solely focuses on the transactions that can affect or impact your business’s tax burden.
The tax accounting process is most commonly used to help a company make the right calculations in preparing tax documents in time for filing season. In the Philippines, however, tax season is all year round, as taxes must be filed monthly, quarterly and yearly under the Philippines tax compliance framework.
In the Philippines, the tax framework followed by individuals and companies alike is governed by the Bureau of Internal Revenue (BIR), an agency within the country’s Department of Finance.
Depending on the policies, rules and regulations set out by BIR, which are largely derived from the Tax Code of the Philippines, tax filings for businesses can require significant review and preparation to ensure taxes are computed accurately and filed on time.
Failure to comply with the tax rules, regulations, timelines may result in varying penalties, which can be either financial or criminal, depending on the circumstances.
Taxes Businesses Need to Settle in the Philippines
All businesses are required to file their returns and pay the correct tax liabilities promptly. Depending on the business type, the tax obligations and requirements can vary. Thus, it is essential to understand the different taxes that can apply to your company.
Below are just some of the common taxes that companies in the Philippines are generally required to apply and submit to the BIR. The list below is not exhaustive and it will be necessary to speak to your accountant or consult your BIR registration documents to understand which taxes your business is required to file and pay in the Philippines.
- Capital Gains Tax (CGT)
This is a tax imposed on the capital gains or profits a business makes from selling assets, such as investments in the form of stocks, bonds, or properties. In the Philippines, capital gains tax is filed through BIR Form 1707 in triplicate within 30 days after the date of a sale giving rise to CGT.
- Income Tax
Income tax returns are filed through BIR Form 1700 and are based upon the level of revenue that a business generates during a particular financial period. This is generally computed based on the current income categories and tax rates in the given year.
- Value-Added Tax (VAT)
Another type of tax businesses should know about in the Philippines is VAT, which is a tax applied on the sale of goods and services. The VAT rate of 12% is typically based on the gross selling price of the subject matter or service being sold. This particular percentage is set in the Philippines but can vary depending on the country.
- Percentage Tax
Percentage tax in the Philippines is another form of sales tax. Percentage tax is based on gross sales, receipts or earnings within the Philippines. However, only certain types of businesses in the Philippines can apply for registration under the percentage tax scheme; this will depend on the status of the business. This covers all earnings you gain from clients or businesses and is filled on BIR Form 2551Q.
- Excise Tax
This is the tax applied to the production, sale, or use of a commodity in a country. Goods and services that come with excise tax include fuel, airline tickets, and other things that can be acquired for business operation purposes.
- Withholding Tax on Compensation
Withholding tax on compensation is the amount that an employer must subtract from an employee’s gross wage and remit to the BIR. This is directly paid to the government and serves as a credit against the income taxes that must be settled within the year.
Practical Tips on Tax Accounting
Managing your finances is a big part of ensuring that you take the necessary steps to manage your tax accounting efficiently, accurately and on a timely basis. Here are some tips to keep in mind:
- Understand your business model
Make sure that you understand your business and that you compute and pay the correct tax amount relevant to your business model and types of business transactions.
- Know your BIR 2303
The BIR Form 2303 outlines the taxes which your company is registered under and obliged to pay to the BIR. While making your tax preparations, you must ensure that the details on the form align with your business model and business operations.
- Understand the frequency and timetable for all applicable tax filings
Staying organized and knowing when you are due to file your taxes can help you stay ahead of deadlines and avoid penalties from BIR. As such, you should be aware of how often you need to keep up with your tax filings, whether monthly, quarterly, or yearly.
- Maintain accurate records
Always ensure that you are keeping detailed and updated records of all financial statements and reports within the year. This will help keep your tax return accurate, and ensure that you don’t fall foul of the tax compliance framework here in the Philippines.
- Manage payroll accordingly
Your business should always have a reliable team to help you manage your payroll and remit the taxes involved. While it can be done by in-house personnel alone, adopting a provider that can offer a payroll service and a payroll management system together can help make the process more efficient.
- Partner with expert tax accountants
If you need help with your tax accounting responsibilities, you can rely on online tax services in the Philippines. This includes notable accounting service providers like CloudCfo, who can give you access to a team of experts to handle your tax accounts more effectively.
Easy Preparations for Tax Protection
Dealing with taxes is never easy, especially considering the different forms of accounting needed to run a business. But despite the challenges, it is vital to understand how these systems work to prepare and manage your business’ liabilities accurately. Otherwise, you risk facing major penalties that can hurt your growth, operations and indeed, reputation.
While not all businesses have the same needs, partnering with a reliable accounting firm in the Philippines can help make preparing for tax filings easier. CloudCfo offers tax accounting services built for startups and small businesses in the Philippines. Learn how you can sort out your tax responsibilities and other finance management requirements conveniently—contact our team of experts today!