Philippines’ strategic location serves as a gateway for businesses to expand into the wider Southeast Asian markets. According to the World Bank Doing Business 2020 report, the country’s ranking has moved up 29 places since the previous year. One of the main reasons is the abolishment of the minimum capital requirements for domestic companies. Are you considering starting a new business in the Philippines? Do you need in-country support for HR functions? Check out Links International’s award-winning HR Outsourcing services and see how we can help with your business growth.
It is of fundamental importance for an employer to understand the tax obligations and taxation system where the business is. To help employers and HR leaders grasp the basics of taxation in the Philippines, Links has put together some essentials of what you need to know about taxes in the Philippines including withholding tax, corporate tax rates and employees’ income tax. The following provides general guidelines only, for more information, please visit the Bureau of Internal Revenue (BIR), the tax authority in the Philippines.
Tax Obligations as An Employer in the Philippines
An employer’s tax obligations commence upon hiring the first employee of the company. Tax obligations of employers in the Philippines include:
- Withholding taxes from employee remuneration
- Submitting annual information returns
- Preparing the Certificate of Compensation Payment/Tax Withheld for employees
- Withholding fringe benefits tax
Withholding Taxes from Employee Remuneration
Employers in the Philippines are liable to deduct and withhold the tax amount from their employees’ wages. They are then required to issue the Certificate of Compensation Payment/Tax Withheld (BIR Form No.2316) to their employees. The withheld amount is to be remitted to the tax authority following a prescribed timeline.
Submit Annual Information Return
The employer should file the annual information returns (BIR Form 1604-C, 1604-F and 1604-E) on or before 31 January following the close of the calendar year. When submitting the annual information return, employers are required to include the following Alphalists as attachments where applicable:
- Alphalist of Employees as of December 31 with no previous employer within the year.
- Alphalist of Employees as of December 31 with previous employer/s within the year.
- Alphalist of Employees terminated before December 31.
- Alphalist of Employees whose compensation income is exempt from withholding tax but subject to income tax.
- Alphalist of Employees other than rank and file who were given fringe benefits during the year.
- Alphalist of Payees subjected to final withholding tax.
- Alphalist of Minimum Wage Earners
Fringe Benefits Tax
Fringe benefits provided by employers to their managerial or supervisory-level staff are subject to a fringe benefits tax of 35% of the grossed-up monetary value of the benefits. According to the Bureau of Internal Revenue, Fringe Benefit is defined as any good, service or other benefits furnished or granted in cash or in-kind by an employer to an individual employee (except rank and file) such as but not limited to the following:
- Expense account
- Vehicle of any kind
- Household personnel (maid, driver and others)
- Interest on loan at less than the market rate to the extent of the difference between the market rate and actual rate granted
- membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations
- Expenses for foreign travel
- Holiday and vacation expenses
- Educational assistance to the employee or his dependents; and
- Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.
The fringe benefits tax is not applicable to fringe benefits provided to rank and file employees. In this case, the fringe benefits are calculated as part of their compensation income along with their wages and subject to the normal income tax rate.
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Philippines Corporate Tax Rates
The standard corporate tax rate in the Philippines is 30%, applied to a company’s taxable income, except for certain passive income which is taxed at a different tax rate, such as royalties from sources within the Philippines are subject to a 20% tax rate.
A domestic corporation is taxed on its worldwide income while a foreign corporation, resident or non-resident, is taxed only on its Philippines-sourced income.
Minimum Corporate Income Tax (MCIT)
The minimum corporate income tax (2% based on gross income) is not an additional tax. Beginning on the fourth taxable year immediately following the commencement of business operations, businesses will pay either the regular corporate income tax or the minimum corporate income tax, whichever is higher.
Branch Profit Remittance Tax
In addition to the standard corporate income tax, branch offices in the Philippines remitting profits abroad to their head office are subject to a 15% branch profit remittance tax. The tax is levied on total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippines Economic Zone Authority).
Employees’ Income Tax in the Philippines
As an employer, it is important, and a responsibility, to understand and facilitate your employee’s tax obligations in addition to your own.
Employees receiving purely compensation income from a single employer, whose income tax has been withheld by the employer, are not required to file income tax returns separately. The Certificate of Compensation Payment/Tax Withheld provided by the employer shall be equivalent to the tax return filing. Income tax return filings are not applicable to employees with a taxable income no more than PHP250,000.
Individual income tax rates vary depending on the employee’s tax residency: citizens, resident aliens and non-resident aliens. Citizens and resident aliens are levied at progressive rates ranging from 0% to 35%. Non-resident aliens who are not engaged in trade or business are levied on a flat rate of 25%.
|Taxable Income||Tax Rate|
|PHP 0 – PHP 250,000||0%|
|PHP 250,001 – PHP 400,000||20%|
|PHP 400,001 – PHP 800,000||25%|
|PHP 800,001 – PHP 2,000,000||30%|
|PHP 2,000,001 – PHP 8,000,000||32%|
|PHP 8,000,001 or above||35%|
Source: Bureau of Internal Revenue (BIR)
An individual with a Net Taxable Income of PHP 800,000
PHP 250,000 x 0% + PHP 150,000 x 20% + PHP 400,000 x 25% = PHP 130,000
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