Philippines company accounting and tax considerations

Since 2003, Healy Consultants, part of Hawksford, assists multi-national clients to timely, accurately and completely discharge their annual legal & accounting and tax statutory reporting obligations. This web page will help you understand the Filipino tax system.

Summary of taxation

• For the first three years after company incorporation, Filipino entities suffer corporation tax of 25% on annual net profits. Thereafter, the entity will pay the higher of i) 25% of annual net profits or ii) a minimum corporate income tax (MCIT) of 2% of annual gross income. To legally minimise taxes, we assist our clients in applying for tax incentives with the Philippines Board of Investments and avail of the tax holidays from the CREATE Act
• Unfortunately, local governments (provinces, cities, and municipalities) impose local business taxes and fees on corporations including i) real property taxes ii) professional taxes and iii) business taxes
• Profits of a Philippine branch remitted to the overseas head office, suffers both annual corporation tax of 25% and a branch profit remittance tax of 15%
• Filipino capital gains suffer tax of 15%. Capital gains derived from the sales of shares of unlisted companies suffer withholding tax of i) 5% on the first US$22,000 and i) 10% thereafter
• VAT of 12% is generally imposed on the sale of goods and services, including imported goods. Zero-rated VAT transactions include i) sales of goods for export and ii) sales of goods and services for registered enterprises within a separate customs territory and iii) sale of power or fuel generated through renewable sources of energy
• Unless reduced by a double tax treaty, a 25% withholding tax is deducted from dividends and royalties and technical services fees paid to non-resident companies. Interest paid to a non-resident entity is subject to a 20% withholding tax. For example, the Philippines-Singapore double tax treaty provides withholding tax of 15% on interest income derived in the Philippines by a resident of Singapore
• The employer is required to withhold salary tax from employee remuneration and remit the same to the BIR. Furthermore, employers are obliged to pay employers’ contributions to the i) Social Security System and the Employees Compensation Program and ii) Home Development Mutual Fund (HDMF), more popularly known as the Pag-IBIG Fund and iii) Philippine Health Insurance Corporation. The employees have a corresponding share in contributions, except for the contributions to the EC which are all paid by the employer
• Imports into the Philippines are generally subject to i) customs duty and ii) VAT and iii) import processing fees and iv) excise tax. The exact amount of taxes is based on the tariff classification. However, there are a few exceptions i) goods that are conditionally taxed and/or duty-exempt importations and 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.

Company compliance considerations

• All Filipino entities must prepare annual audited financial statements, in compliance with the Philippines Financial Reporting Standards. Within 5 months of the accounting year end, our client must submit an annual corporation tax return to the Bureau of Internal Revenue (BIR). Quarterly advance corporation tax must be paid. Late payment of income tax is subject to a penalty of 15% of the total amount due in taxes
• VAT returns must be filed monthly, before 20th day following close of the month and quarterly by the 25th day following end of taxable quarter
• Together with audited financial statements, a legal annual return must be submitted to the SEC
• Every Filipino entity must maintain and keep at its principal office, all minutes of all shareholder meetings and records of all business transactions. Accounting records must be kept in English. The Philippine Peso must be used as the accounting currency. Companies may seek approval from the Securities and Exchange Commission (SEC) and the BIR to elect another functional currency for use in accounting records. The BIR requires registration of an enterprise’s books of account, sales invoices, and official receipts
• Before commencement of business, every Filipino entity must secure a license from its local Business Permits and Licensing Office. Annually, every corporation is required to renew its Mayor’s Permit/ Business Permit with the LGU
• The Philippines does not have laws or regulations defining thin capitalization or otherwise imposing limits on the amount of interest from debt financing which a creditor may impose
• Philippines has signed double taxation avoidance treaties with 44 countries including Australia, Canada, China, Singapore, the United Kingdom and the USA. Tax treaties have the same authority as domestic law. In case of conflict, tax treaty provisions generally prevail over domestic law. The Philippines has several double-tax treaties that may reduce or eliminate income tax. For example, the Philippines-United States Tax Convention (1983) reduces the withholding tax on most cross-border interest payments to a maximum of 15% of the gross amount of such interest
• The BIR’s Transfer Pricing Guidelines apply the arm’s length principle for cross-border and domestic transactions between associate enterprises, which requires the transaction with a related party to be made under comparable conditions and circumstances as a transaction with an independent party
• The Philippines is not a member of the OECD nor has taken steps to adopt the OECD Base Erosion and Profit Shifting (BEPS) two-pillar solution
• The Philippines is a founding and active member of the UN and a founding member of the Association of Southeast Asian Nations (ASEAN). The Philippines is also a member of the East Asia Summit, an active player in the Asia-Pacific Economic Cooperation and a member of the Group of 24 (G-24). The country is a major non-NATO ally of the United States, but is also a member of the Non-Aligned Movement
• Under the Filipino Foreign Investments Act, industry sectors may be classified into:
  • Nationalized industries, where no foreign ownership is allowed. Instead, equity ownership is limited to Filipino citizens only. Examples of business activities include the Practice of professions (e.g. engineering, medicine, accountancy, architecture, law, real estate service
  • Partially nationalized industries, where foreign ownership is subject to prescribed ceilings. Examples of business activities include i) private recruitment, whether for local or overseas employment or ii) ownership of private lands or iii) operation and management of public utilities
  • Liberalized Industries, where 100% foreign ownership is allowed (i.e. no ownership by Philippine nationals is required)

How we can help our multi-national clients

Healy Consultants Group will be happy to help our multi-national Clients with:

• Monthly book-keeping services, maintaining accounting records in compliance with SEC requirements
• Monthly and quarterly Government reporting including i) VAT and ii) payroll and iii) withholding tax and iv) advance corporation tax payments
• Human resource services including recruitment and payroll management
• Supervision of the independent statutory annual audit
• Timely filing of annual corporation tax return and audited financial statements

Conclusion

It is common for our multi-national Clients to outsource to Healy Consultants Group the responsibility to timely discharge their legal, accounting, audit and tax obligations. Over the coming years, we look forward to helping your firm.