Taxation in the Philippines is complex!
The World Bank, in its recent 2020 Ease of Doing Business report, found that:
- The Philippines ranked 95th out of 190 countries in the world for ease of doing business
- The country is also ranked 95th for ease of paying taxes
- It takes a company in the Philippines on average 171 hours to file taxes each year
- It takes 33 days on average to register a business in the Philippines – much of this time relates to tax registration and compliance
So what makes taxation for corporations in the Philippines so complex?
Let’s find out!
1. Sources of Tax Law
To achieve compliance under Philippines tax law, companies must comply with a large web of laws, rules, codes, guidelines, regulations, memorandums and other tax instruments. The multiple sources of law and constant changes to the tax regime contributes significantly to the overall complexity of the Philippines tax system.
To illustrate this, here are the main types of instruments that companies in the Philippines must consider if they wish to achieve full tax compliance:
- The Constitution of the Philippines 1987. The Constitution provides guidance on uniformity and equity of tax laws, due process, protection for taxpayers and prohibitions on various activities such as tax appropriation.
- The NIRC. The taxation system for the Philippines is largely governed by the National Internal Revenue Code of 1997 or the NIRC. The NIRC was derived from the Republic Act (RA) No. 8424, which is also known as the Tax Reform Act of 1997. Since then, there have been numerous amendments made to the NIRC. These amendments are generally implemented through Republic Acts (RAs) enacted by the Senate and House of Representatives of the Philippine Congress. The National Tax Research Centre, a government body dedicated to promoting a fair tax system for taxpayers in the Philippines, maintains a list of RA amendments to the NIRC on their website. Be warned – it’s a long list!
- Revenue Regulations. RRs are tax regulations recommended by the BIR Commissioner and signed by the Secretary of Finance. These regulations define and clarify the rules and regulations to ensure the proper enforcement of the NIRC and its amendments.
- Revenue Memorandum Circulars. RMCs are how the BIR publishes important elements of laws, regulations and precedents issued by the BIR and other relevant government agencies.
- Revenue Memorandum Orders. RMOs are documents issued by the BIR to provide directives and instructions, clarify procedures, define processes and implement guidelines to help taxpayers and agencies understand how to comply with the BIR’s policies and objectives.
- Revenue Rulings. These are administrative rulings by the BIR on particular areas of the taxation system in the Philippines. A revenue ruling can be helpful for companies as it can be relied upon as a precedent. In certain cases, companies might request the BIR to make a ruling on a specific business area or activity in which they are involved and want to have clarity.
- Tax Case Law. These are legal cases taken by the BIR or against the BIR. Legal judgments involving the BIR can help to provide clarity on ambiguous areas of tax law in the Philippines. This will be in the form of decisions from the Supreme Court, Court of Tax Appeals or Court of Appeals in the Philippines.
- Special Laws. These are laws, regulations or instruments that might not fall directly under the category of a “tax law” but might include tax implications and considerations. Some examples include laws relating to PEZA, foreign investment and retail trade.
- Tax Treaties. These are agreements between countries on how they will treat and resolve tax related issues that might impact each country. Treaties are helpful to avoid a situation of double taxation (i.e. taxpayers being taxed in two different countries for the same activity). Tax treaties will help to determine where a tax should be applied and how much tax should be payable in the countries subject to the treaty. The Philippines has entered into tax treaties with various countries – so make sure to investigate if there is a tax treaty with the country that your filipino business is dealing with!
2. Different Systems for Tax Filings
In the Philippines, taxes can be filed using one of three different systems:
- Manual filing of Income Tax Returns
System 1 – e-Filing and Payment System – eFPS
It is not currently mandatory for all businesses to use eFPS. However, all taxpayers are entitled to use this system if they wish.
The businesses that are mandated to file taxes using the eFPS include:
- Taxpayer Account Management Program (TAMP) Taxpayers (RR No. 10-2014)
- Accredited Importer and Prospective Importer required to secure the BIR-ICC & BIR-BCC (RR No. 10-2014) National Government Agencies (NGAs) (RR No. 1-2013)
- All Licensed Local Contractors (RR No. 10-2012)
- Enterprises Enjoying Fiscal Incentives (PEZA, BOI, Various Zone Authorities, Etc.) (RR No. 1-2010)
- Top 5,000 Individual Taxpayers (RR No. 6-2009)
- Corporations with Paid-Up Capital Stock of PHP10 Million and above (RR No. 10-2007)
- Corporations using the Complete Computerized Accounting System or CAS (RR No. 10-2007)
- Procuring Government Agencies with respect to Withholding of VAT and Percentage Taxes (RR No. 3-2005)
- Government Bidders (RR No. 3-2005)
- Insurance companies and Stockbrokers (RMC No. 71-2004)
- Large Taxpayers (RR No. 2-2002, as amended)
- Top 20,000 Private Corporation (RR No. 2-98, as amended)
System 2 – Electronic BIR Forms or eBIRForms
eBIRForms is a method of tax filing in the Philippines where users obtain and complete tax forms offline. Users then only need to go online at the time of submitting the tax forms.
eBIRForms is a more convenient system of filing taxes for:
- Smaller businesses
- Businesses that do not have permanent access to the internet, and
- One-time or once-off taxpayers
So what companies can use eBIRForms?
- Generally, those companies that are not mandated to use eFPS
- Accredited Tax Agents/Practitioners and their client-taxpayers who have authorized them to file on their behalf
- Accredited Printers of Principal and Supplementary Receipts/Invoices
- One-Time Transaction (ONETT) taxpayers
- Those engaged in business, or those with mixed-income who will file a “NO PAYMENT” Return (exception under RMC No. 12-2015)
- Government-Owned or Controlled Corporations (GOCCs), Local Government Units (LGUs). Not including barangays
- Cooperatives registered with NEA and LWUA
System 3 – Manual Filing of ITR
This method involves the preparation and filing of your Income Tax Return, or ITR, personally in the local Revenue District Office, or RDO, where your company is registered.
This manual system is for taxpayers who are exempted from electronic filing of tax returns. This might include senior citizens and persons with disabilities (PWDs). This system is also open to those who are unable to use the eFPS and eBIRForms as they may not have the technical capabilities or necessary systems in place.
It’s clear from the World Bank Report, that your business is going to spend a lot of time filing taxes (171 hours on average per year!). It is therefore crucial to understand which filing system is best for your company and how to make it as efficient as possible for your team and business.
3. Numerous Tax Categories
After having registered your corporation with the SEC and received your Certificate of Registration, it’s time to register with the BIR for tax filing purposes. This registration must be done within 30 days of SEC registration.
Remember – even if your new corporation is not yet operational or earning revenue, you still have tax filing obligations!
Once registered with the BIR, your corporation will receive BIR Form 2303. This is also known as the BIR Certificate of Registration, or COR, and it serves a number of purposes.
BIR Form 2303 grants corporations the right to operate in the Philippines. It also grants corporations a Tax Identification Number or TIN, which must be used as an identifier on all tax submissions.
Importantly, Form 2303 also outlines the specific taxes that each corporation is required to pay.
Below are just some of the taxes that your Philippine corporation may be required to pay! Each tax type has its own nuances, applicability, calculations and relevance to your business activities – there is no “one size fits all”. Section 5 provides a detailed explanation for many of these taxes.
- Corporate Income Tax
- Capital Gains Tax
- Documentary Stamp Tax
- Interest Tax
- Percentage Tax
- Withholding Tax on Compensation
- Final Withholding Tax
- Value Added Tax – VAT
- Expanded Withholding Tax
- SSS Contribution
So make sure, from the very first day of registration, that you know all of the corporate taxes that your business is required to pay and when they have to be paid!
4. Monthly, Quarterly and Annual Filings
Companies in the Philippines are required to file taxes at various times throughout the year – monthly, quarterly and annually.
With so many different types of filings at so many different times of the year, a company and its accountants need to be constantly monitoring their tax calendar to ensure no filings are missed!
The periods for tax filings may depend on the class of business, type of sector or internal accounting and financial practices. Check out our Tax Calendar (updated each month) to understand when your company taxes need to be filed.
These are just some of the common taxes and relevant tax periods with which companies in the Philippines must comply!
Monthly Tax Filings
- Value-Added Taxes. VAT is an indirect tax on sales or services passed on from the seller to a buyer. In the Philippines, Value Added Tax is set at 12% for taxable sales. Value-added taxes are filed monthly using BIR Form 2550M. The deadline for filing and payment is the 20th of the following month.
- Withholding Tax on Compensation. All employers are required to withhold taxes from employees whose payroll is subject to tax. Withholding taxes on compensation are filed using Form 1601C. The due date for 1601C is every 10th of the following month, except for the month of December where the deadline is the 15th of the following month.
- Expanded Withholding Taxes. Withholding taxes are taxes that are collected by businesses on behalf of the government. These taxes are subsequently remitted by businesses to the government. Withholding tax rates vary depending on the nature of the services provided or the purchase of goods. For example, a 5% withholding tax should be applied to rentals. You can find out more about the applicable withholding tax rate for specific transactions on the BIR’s website. Expanded withholding taxes are reported using BIR Form 0619E. The deadline for 0619E is every 10th of the following month.
Quarterly Tax Filings
- Corporate Income Taxes. Income taxes are taxes which are levied upon the income of a businesses or self-employed professionals. In the Philippines, income taxes are filed quarterly. Quarterly income taxes of corporations and partnerships are filed using Form 1702Q. Self-employed individuals, estates and trusts file their quarterly income taxes using Form 1701Q.
- Value Added Taxes (VAT). Quarterly VAT is filed using Form 2550Q. The deadline for quarterly filing is every 25th of the month following the end of the quarter.
- Summary List of Sales and Purchases. Summary List of Sales and Purchases or SLSP is a schedule of all VAT transactions of a business. This list includes supplier names, addresses, TINs, amount, the base amount, and VAT amount, as well as additional data. SLSP is prepared using RELIEF or the Reconciliation of Listings for Enforcement.
- Percentage Tax. This is a direct tax imposed on businesses that are non-VAT Registered. There are different rates for percentage tax so each business needs to verify which rate applies to them. The most common percentage tax rate is 3%. Percentage tax is filed quarterly using BIR Form 2551Q.
- Quarterly Expanded Withholding Taxes Quarterly filing of EWT is done on the 20th of the month following the quarter, using BIR Form 1601EQ.
Annual Tax Filings
- Audited Financial Statements. Businesses are required to submit audited financial statements to the BIR every April 15, otherwise known as audit season. This statement will also identify which taxes have been paid – so businesses need to ensure their taxes are in order at this point! If you wish to know more about the audit season in the Philippines, you can read our guide for 2019 here.
- Income Tax. Annual income taxes are paid annually using Form 1701 for corporations and partnerships, and 1702 for self-employed individuals, estates and trusts. The deadline is every 15th day of the 4th month following the end of the taxable year. c. 1604CF (Annual Information Return of Income Tax Withheld on Compensation) – is a summary of the taxpayers from whom an employer had withheld income tax during the taxable year. The deadline for filing Form 1604C is prior to 31 days after the end of the taxable year.
5. Corporate Residence
The taxes that have to be paid by a corporation in the Philippines will depend on its corporate resident status within the country.
A corporation will be considered resident (and tax liable) in the Philippines in the following circumstances:
- The corporation has been incorporated or set-up in the Philippines under Philippine laws; or
- It is a foreign resident corporation that has been registered with the SEC and licensed to operate in trade or business in the Philippines.
A domestic corporation is liable to pay income tax on all of its taxable income derived from worldwide sources.
However, a foreign corporation is only taxed on income that is derived or deemed to have been derived in the Philippines.
It is therefore important for the management or owners of a business to understand the residency status of their company and all potential tax implications relating to this status to ensure compliance under the Philippines tax system.
6. Top Withholding Agents
As noted above, the Philippine tax laws require businesses to withhold part of a payment for services or goods to a supplier and remit that portion to the government on behalf of its supplier who in turn can use this withholding as a credit against their income tax liability.
If your company is designated a Top Withholding Agent, however, you will be required to withhold tax on all purchases of goods (1%) and services (2%).
Top Withholding Agents are those businesses that were previously identified by the BIR as TWAs (and have not been de-classified), in addition to those that have been newly identified under the Taxpayer Account Management Program (TAMP).
Revenue Regulation 11-2018 has designated the following taxpayers as Top Withholding Agents:
- Large Taxpayers under Revenue Regulation No. 1-1998, as amended by Sections 4.5, 5.1 and 5.2 under RR 17-2010
- The Top 20,000 private companies under RR No. 6-2009
- The Top 25,000 individual taxpayers under RR No. 6-2009
- Medium Taxpayers as defined under RMO 17-2017. These are the top 500 non-individual taxpayers that meet the requirements of a Large Taxpayer, but have not yet been designated by the BIR
- All those that are identified under TAMP (Taxpayer Account Management Program) as per RR 10-2014.
For more information on withholding tax, check out our recent article, Withholding tax in the Philippines – are you aware of your obligations?
A Less Complex System
There are some positive changes happening within the Philippines tax system!
While the World Bank’s 2020 report did rank the Philippines 95th out of 190 countries for ease of doing business, this was a significant jump from 2019 when it was ranked 124th! Undoubtedly a big step forward.
The average time it takes a company to file taxes in one year has also decreased – from 185.6 hours (2019) to 171 hours (2020). Another metric heading in the right direction!
There has been another significant change in the Philippine taxation system in recent times, in the form of the Comprehensive Tax Reform Program.
The CTRP is a government program aimed at making the Philippine tax system simpler, fairer and more efficient as well as to promote investment, create jobs and reduce poverty. Through a number of reform packages (TRAIN law, Tax Amnesty, corporate income tax and incentives), steps are being taken to improve and optimize the Philippines tax system.
These are all positive and helpful steps forward for in-house accountants, outsourced accounting, bookkeeping and finance service providers and most importantly, our clients!
Tax and Compliance Experts in the Philippines
CloudCfo are the accounting, bookkeeping and finance experts for businesses in the Philippines!
Our team of CPAs and tax experts can help you with all of your company’s tax and compliance needs. We know the local landscape and we understand the potential pain points.
Tax registration, tax filings, catch-up on missed filings, employee-related taxes and all other forms of corporate tax-related activities that your business might require. Just let us know how we can help!
Visit us at cloudcfo.ph or contact us at firstname.lastname@example.org for more information on how we can add real value to your accounting, bookkeeping, finance and tax compliance services.