The taxation policy in the Philippines is chiefly governed by several key Republic Acts, including the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Act), the Tax Reform for Acceleration and Inclusion (TRAIN) Law, Article VI, Section 28 of the Constitution, the National Internal Revenue Code, and the Local Government Code of 1991.
Tax Structure
The country imposes a territorial tax system, meaning only Philippine-sourced income is subject to Philippine taxes. The corporate income tax rate stands at 25 percent, with domestic micro, small, and medium-sized companies benefiting from a preferential rate of 20 percent. This preferential rate applies to businesses with taxable income of up to PHP 5 million (US$85,611) and not exceeding PHP 100 million (US$1.7 million). Non-resident companies are taxed only on their Philippine-sourced income, while domestic companies are taxed on their worldwide income.
Ease of Paying Taxes (EOPT) Act
The Ease of Paying Taxes Act, also known as Republic Act No. 11976, became effective on January 22, 2024. This law aims to modernize tax administration and streamline processes to encourage easier compliance for taxpayers. Notable changes include the new classification of taxpayers based on gross sales:
- Micro: Less than PHP 3 million (US$51,379)
- Small: PHP 3 million to less than PHP 20 million (US$342,529)
- Medium: PHP 20 million to less than PHP 1 billion (US$17.1 million)
- Large: PHP 1 billion and above
Minimum Corporate Income Tax
A minimum corporate income tax (MCIT) of two percent is imposed on the gross income of both domestic and resident foreign corporations annually. It is imposed from the beginning of the fourth taxable year immediately following the commencement of business operations. The MCIT is applied when the standard 20 percent CIT is lower than the two percent MCIT on the company’s gross income. Any excess of the MCIT over the normal tax may be carried forward and credited against the normal tax for the three immediately succeeding taxable years.
Withholding Tax
Dividends distributed by a resident company are subject to withholding tax at 25 percent; those distributed to non-residents are taxed at 15 percent, provided the country of the non-resident recipient allows a tax credit of 15 percent. The withholding tax may be reduced under an applicable tax treaty.
Interest paid to a non-resident is subject to a 20 percent withholding tax unless otherwise stipulated under a tax treaty. Royalty payments made to a domestic or resident company are subject to a final withholding tax of 20 percent, while a 25 percent withholding tax is levied on royalty payments to non-residents.
Fringe Benefits Tax
Fringe benefits granted to supervisory and managerial employees are subject to a 35 percent tax on the grossed-up monetary value of the fringe benefit. Under new income tax regulations, fringe benefits mean any good, service, or other benefit granted in cash or kind, other than basic compensation, by an employer to an individual employee. These benefits include housing, expense accounts, vehicles, household personnel, interest on loans at below market rate, club membership fees, expenses for foreign travel, holiday and vacation expenses, education assistance, and life or health insurance premiums.
Branch Profit Remittance Tax
Branches of foreign companies in the Philippines, except those registered with the Philippine Economic Zone Authority, are subject to income tax at 30 percent of their income derived within the Philippines. A 15 percent branch profit remittance tax (BPRT) is levied on the after-tax profits remitted by a branch to its head office. After-tax profits remitted by a branch do not include income items that are not effectively connected with the conduct of its trade or business in the Philippines.
Improperly Accumulated Earnings Tax
Income accumulated by closely held corporations with the purpose of avoiding tax attracts an improperly accumulated earnings tax (IAET) of 10 percent. The closely held corporation may refer to companies wherein at least 50 percent of the capital stock or voting power is owned directly or indirectly by not more than 20 individuals.
Personal Income Tax
The Philippines implements a progressive personal income tax rate of up to 35 percent. The TRAIN Act stipulated provisions to reduce personal income tax on all taxpayers except those in the highest income bracket. Taxpayers in all income brackets below PHP 8 million (US$142,900) will see between a two and five percent reduction in personal income tax rate from January 1, 2023, onwards.
Value-Added Tax
The 12 percent value-added tax (VAT) rate is imposed on most goods and services that have achieved actual gross sales of over PHP 3 million (US$51,379). The Philippines issued a VAT exemption for registered exporters on their local purchases of goods and services through Revenue Regulations (RR) No. 21-2021. The VAT privilege covers the sale of equipment, supplies, packaging materials, and goods for a maximum period of up to 17 years.
File and Pay Anywhere
Taxpayers can now file returns and pay taxes at any authorized agent bank or Revenue District Office (RDO), enhancing convenience and eliminating the 25% surcharge on wrong-venue filings.
