All companies opening a business in the Philippines are subject to corporate income tax. Knowing which taxes can impact on your company will help you create a better business structure while working in the Philippines. A good understanding of corporate taxes can help investors better comply with domestic laws. It will also allow them to use tax incentives to their advantage.
Read on to learn more about corporate taxes in the Philippines.
Standard corporate tax rate
The corporate tax system reform bill was passed into law on September 16, 2019. The Bill, which takes effect 2020, will affect both domestic and foreign businesses in the Philippines.
The most notable clause of the Corporate Income Tax and Incentives Rationalization Act (CITIRA) is the reduction of corporate income taxes from 30% to 20% over a span of 10 years. The current rate will see a 2% reduction every two years starting in 2021 until it hits a rate of 20% by 2029.
CITIRA rationalizes certain tax incentives to encourage more foreign direct investments (FDI) while making micro-, small-, and medium-sized enterprises more competitive. These reforms aim to create the optimal environment for investment and spur job growth.
Companies incorporated in the Philippines are taxed based on their worldwide net taxable income. Meanwhile, branch offices of foreign corporations are taxed depending on the revenue they’ve accumulated in the Philippines.
Corporate tax incentives
The CITIRA provides new tax incentives that eliminate incentives given by the Board of Investments, the Philippine Economic Zone Authority (PEZA), and other investment promotion agencies. The new tax incentives include a 10% deduction on the deprecation of qualified capital expenditures (CAPEX) for buildings, and a 20% off on the deprecation of qualified CAPEX for machinery.
Businesses can also expect to claim a 100% deduction on expenses incurred for research and development, labor training, and country-wide infrastructure development.
There’s also an incentive known as enhanced net operating loss carry-over (NOLCO). NOLCO refers to the excess of deductible expenses over gross income resulting in a net loss for the taxable year.
Deductions from gross income can be carried over for five (5) consecutive taxable years immediately following the year that the loss was incurred. Deductions claimed must have been properly stated in the prior year’s audited financial statements and income tax returns.
Businesses can also claim the following deductions:
- Up to 50% for profits reinvested in the manufacturing industry
- Up to 50% for domestic input expense
- Up to 150% for direct labor expenses
- Exemption from paying import duties of imported raw materials and equipment
To be eligible for these CITIRA incentives, your business must make the following economic contributions:
- Create high-quality jobs
- Stimulate economic growth in rural areas or for local industries
- Promote high-value exports
- Use new and modern technology
- Introduce new supply-chain links and develop a pioneer industry
The Fiscal Incentives Review Board (FIRB) evaluates companies that have availed themselves of incentives every two years to ensure that they remain in compliance with the set criteria.
Minimum Corporate Income Tax (MCIT)
The regular corporate income tax (RCIT) rate is 30% on net taxable income. However, minimum corporate income tax (MCIT) is imposed on domestic and resident foreign corporations when the standard corporate tax rate is lower than 2% of the company’s gross income. This applies beginning on the fourth year of commercial operations.
If a company’s MCIT payment is found to be in excess of what should have been due, the excess amount can be carried over as a tax credit against RCIT dues in the succeeding taxable years.
Branch Profit Remittance Tax (BPRT)
As previously stated, foreign-based companies or corporations operating in the Philippines are taxed according to the income they’ve generated locally. However, there are instances when foreign companies are subject to special tax rates such as the Branch Profit Remittance Tax (BPRT).
The BPRT covers branches of foreign companies in the Philippines (except those registered with PEZA). Companies under this category are subject to a 30% income tax rate on any revenues accumulated in the Philippines.
The after-tax profits sent by a branch to its head office are subject to a 15% BPRT. After-tax profits do not include items not connected with its business in the country such as:
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- Interests
- Dividends
- Rents
- Royalties
- Remuneration for technical services
- Salaries
- Wages
- Premiums
- Annuities
- Emoluments
- Determinable annual, periodic, or casual gains
- Income and capital gains
Withholding tax
Businesses are responsible for withholding a part of the payment for services rendered or goods from a supplier and remitting such to the government in compliance with tax regulations. Withholding tax includes the following:
- Dividends – Subject to 15% tax, as long as the foreign corporate recipient allows it. If not, it is subject to a 30% withholding tax rate.
- Interest – Interest paid to non-residents is subject to 20% withholding tax.
- Royalties – Royalty payments to non-residents are subject to 20% withholding tax.
- Technical service fees – These are subject to 30% withholding tax unless stated otherwise by a tax treaty.
Navigate the Philippine tax system with ease. Get in touch with the experts at FilePino today! Contact us at +1.806.553.6552 (USA) or +63.917.892.2337 (Philippines).
