Filing Tax Returns for Your Business in the Philippines: What You Need to Know

Filing Tax Returns for Your Business in the Philippines: What You Need to Know

All individuals and corporations (including partnerships) in the Philippines should file their income tax returns (ITR) no later than April 15 of every year. Most businesses, however, are required to pay their taxes quarterly, and file their annual ITR by April 15th, showing all previous payments made and other relevant transactions.

Tax-exempt companies

Certain companies or organizations are exempted from paying income taxes in the Philippines. They include:

  • Non-stock corporation for religious, charitable, scientific or any other purpose, where none of the income belongs to any stockholder or individual

  • Non-profit organizations, such as a chamber of commerce or a business association

  • Non-profit labor, agricultural or horticultural organization

  • Non-profit civic organization

Paying taxes for sole proprietorships

Income tax for earnings in a sole proprietorship or professional fees is filed as part of your personal income tax returns. It is computed according to your net income, which is your gross taxable income less the cost of goods sold or services rendered, and deductible expenses.

The income tax rate for sole proprietorships and professional fees increases as your income increases. The more income you make, the higher your tax rate is.

Paying taxes for corporations

Corporations (including partnerships) in the Philippines are taxed according to their structure. For tax purposes, corporations are classified as follows:

  • Domestic corporation – set up under Philippine laws, either as Filipino-owned or foreign-owned

  • Resident foreign corporation (RFC) – set up under foreign laws, but operating or hasa presence in the Philippines. They may or may not be making an income from Philippine sources. RFCs include:

    • Branch office of a foreign corporation

    • International carriers

    • Regional headquarters (RHQ)

    • Regional operating headquarters (ROHQ)

    • Offshore banking units

  • Non-resident foreign corporation – set up under foreign laws, and not operating and doing trade or business in the Philippines, but may be earning income in the Philippines in some way.

Income taxes paid by corporations

The basic income taxes applied on corporations are as follows:

  • Regular corporate income tax (RCIT) – paid annually based on taxable income

  • Minimum corporate income tax (MCIT) – paid starting on the fourth taxable year of the business, if the MCIT is greater than the RCIT

  • Improperly accumulated earnings tax (IAET) – paid if the accumulated earnings are more than 100% of the paid-in capital. This does not apply to the following:

    • Companies registered with PEZA and other special economic zones

    • Listed corporations

    • Banks and other financial institutions

    • Insurance companies

Corporate income tax rates

Corporate income tax rates are determined primarily by the business’ corporate structure and nature of activity.

  • Domestic corporations are taxed at the following rates:

    • RCIT – 30% of taxable income

    • MCIT – 2% of gross income

    • IAET – 10% of the improperly accumulated taxable income

  • RFCs, except for RHQs and ROHQs, are taxed at the same rates as domestic corporations, but only for incomes made from their Philippine operations

  • RHQs are exempted from the RCIT

  • ROHQs are taxed at 10% of taxable income

  • NRFCs are taxed at 30% of gross income for earnings made from Philippines sources.

Special corporate tax rates, including full or limited exemptions from the RCIT, apply to certain incomes and corporations, such as:

  • BOI-registered companies

  • Companies registered with PEZA or other special economic zones

  • International carriers from countries which are parties to tax treaties or international agreements joined by the Philippines

  • Projects and activities under the Renewable Energy Act

  • Income of depository banks from eligible foreign currency transactions

Types of income

In computing for taxable income, income types, including those below, must be taken into account.

  • Exempt income – earnings that are exempted from income tax

  • Final income – earnings subjected to withholding tax. Taxes on this type of earnings have already been withheld, so it is excluded from the corporation’s taxable income

  • Capital gains – earnings made from the sale of capital assets, which are subject to different tax rates

  • Ordinary income – all other earnings subject to normal income tax