Philippines legal and accounting and tax considerations in 2023
Corporate income tax considerations
- Companies registered in the Philippines are subject to a corporate income tax at a standard rate of 25%;
- Capital gains are subject to standard corporate income tax. Capital gains derived from the sales of shares of unlisted companies are also subject to withholding tax of i) 5% on the first US$22,000 earnt (PHP 100,000) and ii) 10% thereafter;
- A 12% Value Added Tax (VAT) is applicable on the sale and importation of certain goods and services;
- A 30% withholding tax is applicable on dividends, royalties and technical services fees paid to non-resident companies, unless reduced where a country provides a tax credit;
- Interest paid to a non-resident entity is subject to a 20% withholding tax unless reduced under a tax treaty, subject to approval by the BIR;
- A 15% branch remittance tax is applicable on the after-tax profits remitted by a branch office to its parent company.
- Manufacturing companies with bonded warehouses enjoy complete exemption from customs duty on importation of required goods and spare parts;
- Companies setting up regional operating headquarters in the Philippines are subject to a reduced corporate tax rate of 10%;
- Employing entities are eligible for a 50% deduction for the labour expenses for up to 5 years for new projects exceeding a certain ratio of capital equipment to their employees;
- Pioneer and non-pioneer companies are eligible for income tax holidays from 3 to 8 years for new and expansion projects and projects in remote regions;
- Philippines businesses are permitted to carry forward their losses for up to 3 years. Carryback is however not allowed.
- All companies must file their tax returns with the Philippines Bureau of Internal Revenue within 4 months following end of their financial year;
- VAT returns must be filed i) monthly, before 20th day following close of the month and ii) quarterly, by the 25th day following end of taxable quarter;
- Late payment of income tax will be subject to a penalty of 15% of the total amount due in taxes;
- All foreign-owned entities or companies with foreign investments are required to have their accounts audited each year.
Improperly accumulated earning tax (IAET) in the Philippines
- The improperly accumulated earnings tax applies to every corporation designed or availed for evading the income tax for its shareholders or the shareholders of any other corporation, by allowing earnings and profits to accumulate instead of distributing them;
- The IAET is obligatory for each taxable year on the improperly accumulated taxable income of each corporation, a tax rate of ten percent (10%) is levied on the same;
- The dividends must be declared and paid or issued by the corporations not later than one year following the close of the taxable year, otherwise, the IAET, if any, should be paid within fifteen (15) days thereafter;
- The benchmark of the liability is that of the purpose behind the accumulation of the income and not the consequences of the accumulation. Thus, if a corporation fails to pay its dividends due to some other causes, such as the use of undistributed earnings and profits for the reasonable needs of the business, under such circumstances the company would not generally be subjected to pay tax for its accumulated or undistributed earnings;
- Not all corporate taxpayers are subject to a 10% IAET in the Philippines. The cases for exemption are as below:
- Publicly held corporations;
- Banking and other non-banking financial intermediaries;
- Insurance companies;
- Taxable partnerships;
- General professional partnerships;
- Tax-exempt joint ventures;
- Economic Zone (Ecozone) under special tax rate;
- Philippine branch of a multinational company.
- An alternative minimum tax (MCIT) of 2% is applicable on companies not generating income by the fourth year of operation;
- Employers are required to submit monthly social security contributions of up to US$25 on salaries of covered employees;
- Philippines has signed double taxation avoidance treaties with 41 countries including Australia, Canada, China, Singapore, the United Kingdom and the USA to reduce withholding tax on payments abroad;
- Healy Consultants’ Philippines tax planning services are tailored to meet the precise needs of international entrepreneurs. Unlike many corporate services providers, we take a global approach to our tax planning services, thinking ‘outside the box’ to provide a creative solution which fits your needs;
- It is important our Clients’ are aware of their personal and corporate tax obligations in their country of residence and domicile; and they will fulfill those obligations annually. Let us know if you need Healy Consultants’ help to clarify your annual reporting obligations.
Legal and compliance
Healy Consultants Compliance Department assists our global Clients efficiently and completely discharge their Philippines legal and compliance obligations when establishing and doing business in the Philippines.
Company compliance considerations
- All companies registered in the Philippines must prepare annual financial statements which must be audited by an external independent CPA;
- Every registered company must maintain and keep at its principal office, all minutes of all shareholder meetings and records of all business transactions;
- Before commencement of business, every Philippines company must obtain a license from its registered city Business Permits and Licensing Office;
- Companies looking to trade actively and issue receipts and invoices must first obtain authority to print receipts and invoice from the Bureau of Internal Revenue;
- All foreign entities conducting business in Philippines must appoint and maintain a resident agent in the Philippines.
- All goods imported into the Philippines shall be entered through a customs office at the port of entry, or may be admitted to or removed from a free zone;
- All goods that are imported into the Philippines, are subject to duty upon importation, including those goods that have been previously exported from the Philippines. However, there are a few exceptions i) goods that are conditionally taxed and/or duty-exempt importations, ii) goods considered as De Minimis imports and iii) Imports under the Customs Bonded Warehousing Systems and those that are intended for free port zones etc.;
- All imported goods shall be subject to the lodgment of a goods declaration. A goods declaration can be for consumption, for customs bonded warehousing, for admission, for conditional importation, or for customs transit;
- The Goods Declaration must be lodged in a period of 15 days from the date of discharge of the last package from the carrier or aircraft. This period might be extended upon request to the Commissioner of DTI , which should be made before the expiration of the original period within which the goods declaration has to be lodged;
- There is an existing “Selectivity System” that assesses the risk criteria established in the Customs Cargo Clearance System and thereafter determines the examination processes that it should go through. The Selectivity System assigns any one of the following channels to the goods.
- Red lane: documentary check along with physical examination or non-intrusive checking of the commodities;
- Yellow lane: only documentary checks are conducted;
- Blue lane: commodities must be considered for post-clearance audit;
- Green lane: released without any documentary check or examination of the goods;
For a deeper insight into all the import regulations of Philippines you can refer to their Customs Modernization and Tariff Act.
Employer and other considerations
- The maximum working hours per day in the Philippines must not exceed 8 hours for all employees for five days per week;
- Every employee must be paid regular daily wage during the regular official public holidays with exemption to service and retail industries regularly employing less than 10 workers;
- An employer may only terminate an employee if there is legal cause for termination and has followed the required procedures for termination;
- An employee may however terminate their employment by issuing a written notice to the employer in advance of one month;
- Under the 1987 Philippines Constitution, employees have the right to form, join and participate in labour unions;
- Every employer and employee in the Philippines is required to be a member of, and make monthly contributions to the Social Security System (SSS), Home Development Mutual Fund (Pag-IBIG Fund) and Philippine Health Insurance Corporation (PhilHealth).
Tenth regular foreign investment negative list in Philippines
List A: Foreign ownership is limited by mandate of the constitution and specific laws
No Foreign-owned entities allowed – only local shareholders can conduct such business activities 1. Mass media except recording (Art. XVI, Sec.11 of the Constitution; Presidential Memorandum dated 05 May 1994) 2.
Practice of professions (Art. XII, Sec. 14 of the Constitution, sec. 1 of RA 5181, Sec. 7.j of RA 8981)
- Pharmacy (RA 5921)
- Radiologic and x-ray technology (RA 7431)
- Criminology (RA 6506)
- Forestry (RA 6239)
- Law (Art. VIII, Section 5 of the Constitution; Rule 138, sec. 2 of the Rules of Court of the Philippines)
3. Retail trade enterprises with paid-up capital of less than US$ 2,500,000 (Sec. 5 of RA 8762) 4. Cooperatives (Ch. III, Art. 26 of RA 6938) 5. Private security agencies (Sec. 4 of RA 5487) 6. Small-scale mining (Sec. 3 of RA 7076) 7. Utilization of marine resources in archipelagic waters, territorial sea, and exclusive economic zone as well as small-scale utilization of natural resources in rivers, lakes, bays, and lagoons (Art. XII, Sec 2. of the Constitution) 8. Ownership, operation, and management of cockpits (Sec. 5 of PD 449) 9. Manufacture, repair, stockpiling, and/or distribution of nuclear weapons (Art. II, Sec. 8 of the Constitution) 10. Manufacture, repair, stockpiling, and/or distribution of biological, chemical and radiological weapons, and anti-personal mines (various treaties to which the Philippines is a signatory and conventions supported by the Philippines) 11. Manufacture of firecrackers and other pyrotechnic devices (Sec. 5 of RA 7183) No wholly foreign-owned entities allowed – only joint ventures with a 80% local shareholder 12. Private radio communication network (RA 3846) No foreign-owned entities allowed – only joint ventures with a 75% local shareholder 13. Private recruitment, whether for local or overseas employment (Art. 27 of PD 442) 14.
Contracts for the construction and repair of locally-funded public works (Sec. 1 of Commonwealth Act. No. 541, Letter of Instruction No. 630) except:
- Infrastructure/development projects covered in RA 7718; and
- Projects which are foreign-funded or assisted and required to undergo international competitive bidding (Sec. 2(a) of RA 7718)
15. Contracts for the construction of defense related structures (Sec. 1 of CA 541) No foreign-owned entities allowed- only joint ventures with a 70% local shareholder 16. Advertising (Art. XVI, Sec. 11 of the Constitution) No foreign-owned entities allowed – only joint ventures with a 60% local shareholder 17. Exploration, development, and utilization of natural resources (Art. XII, Sec. 2 of the Constitution) 18. Ownership of Private Lands (Art. XII, Sec. 7 of the Constitution; Ch. 5, Sec. 22 of CA 141; Sec. 4 of RA 9182) 19. Operation of public utilities (Art. XII, Sec. 11 of the Constitution; Sec. 16 of CA 146) 20. Educational institutions other than those established by religious groups and mission boards (Art. XIV, sec.4 of the Constitution) 21. Culture, production, milling, processing, trading except retailing, of rice and corn and acquiring, by barter, purchase or otherwise, rice and corn and the by-products thereof (Sec. 5 of PD 194) 22. Contracts for the supply of materials, goods and commodities to government-owned or controlled corporation, company, agency or municipal corporation (Sec. 1 of RA 5183) 23. Facility operator of an infrastructure or a development facility requiring a public utility franchise (Art. XII, Sec. 11 of the Constitution; Sec. 2 (a) of RA 7718) 24. Operation of deep sea commercial fishing vessels (Sec. 27 of RA 8550) 25. Adjustment companies (Sec. 332 of RA 10607 amending PD 612) 26. Ownership of condominium units (sec. 5 of RA 4726)
List B: Foreign ownership is limited for reasons of security, defense, risk to health, and morals and protection of small and medium-scale enterprises
Allowed Limited Foreign ownerships - only joint venture with a 60% shareholder 1.
Manufacture, repair, storage, and/or distribution of products and/or ingredients requiring Philippine National Police (PNP) clearance:
- Firearms (handguns to shotguns), parts of firearms and ammunition therefore, instruments or implements used or intended to be used in the manufacture of firearms;
- Blasting supplies;
- Ingredients used in making explosives
- Chlorates of potassium and sodium;
- Nitrates of ammonium, potassium, sodium barium, copper (11), lead (11), calcium and cuprite;
- Nitric acid;
- Perchlorates of ammonium, potassium and sodium;
- Amorphous phosphorus;
- Hydrogen peroxide;
- Strontium nitrate powder;
- Telescopic sights, sniper scope and other similar devices.
However, the manufacture or repair of these items may be authorized by the Chief of the PNP to non-Philippine nationals; Provided that a substantial percentage of output, as determined by the said agency, is exported. Provided further that the extent of foreign equity ownership allowed shall be specified in the said authority/clearance (RA 7042 as amended by RA 8179).
Manufacture, repair, storage, and/or distribution of products requiring Department of National Defense (DND) clearance:
- Guns and ammunition for warfare;
- Military ordnance and parts thereof (e.g., torpedoes, depth charges, bombs, grenades, missiles);
- Gunnery, bombing, and fire control systems and components;
- Guided missiles/missile systems and components;
- Tactical aircraft (fixed and rotary-winged), parts and components thereof;
- Space vehicles and component systems;
- Combat vessels (air, land, and naval) and auxiliaries;
- Weapons repair and maintenance equipment;
- Military communications equipment;
- Night vision equipment;
- Stimulated coherent radiation devices, components, and accessories;
- Armament training devices;
- Others as may be determined by the Secretary of the DND;
However, the manufacture or repair of these items may be authorized by the Secretary of National Defense to non-Philippine nationals; provided that a substantial percentage of output, as determined by the said agency, is exported. Provided further that the extent of foreign equity ownership allowed shall be specified in the said authority/clearance. (RA 7042 as amended by RA 8179)
3. Manufacture and distribution of dangerous drugs (RA 7042 as amended by RA 8179) 4. Sauna and steam bathhouses, massage clinics and other like activities regulated by law because of risks posed to public health and morals (RA 7042 as amended by RA 8179) 5. All forms of gambling (RA 7042 as amended by RA 8179) except those covered by investment agreements with PAGCOR (PD 1869 as amended by RA 9487) 6. Domestic market enterprises with paid-in equity capital of less than the equivalent of US$200,000 (RA 7042 as amended by RA 8179) 7. Domestic market enterprises which involve advanced technology or employ at least fifty (50) direct employees with paid-in equity capital of less than the equivalent of US$100,000 (RA 7042 as amended by RA 8179)