All individuals and corporations (including partnerships) in the Philippines adapting a calendar year 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 (on the dates indicated in their BIR 2303 – Certificate of Registration), and file their annual ITR by April 15th, showing all previous payments made and other relevant transactions.
Income Tax-Exempt Companies
As the term implies, tax exemption refers to a person’s or organization’s legal ability to request an exemption from or a decrease in the amount of taxes that they owe the Bureau of Internal Revenue (BIR), subject to meeting specific standards. A Certificate of Tax Exemption (CTE), proving that they are exempt from paying specific taxes, is subsequently given to those who qualify for tax exemptions.They include:
- Individuals with no income, minimum wage earners, and those whose taxable income does not exceed PHP 250,000.
- Non-stock, nonprofit educational institutions.
- Non-stock, nonprofit corporations that fall under Section 30 of the National Internal Revenue Code.
- Cooperatives registered in the Cooperative Development Authority (CDA) which transact business with members only.
- CDA-registered cooperatives which transact business with members and non-members, with accumulated reserves and undivided net savings of not more than PHP 10 million.
Taxes for Sole Proprietorships of Business, Freelancer, Independent Contractor, Self-Employed and Professional
Income tax for earnings in a sole proprietorship business 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 has a 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 (NRFC) – 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
Filing tax returns for your business in the Philippines can be complex, but it doesn’t have to be. Filepino is here to ensure you navigate the process smoothly and stay compliant with all regulations.
… and you might just need our assistance.
Are you struggling with filing tax returns for your business in the Philippines? Set up a consultation with FilePino today! Call us at (02) 8478-5826 (landline) and 0917 892 2337 (mobile) or send an email to info@filepino.com.