What Taxes Apply When Doing Business in the Philippines?
By: Noel C Ducusin
This article is a response to a query from our friends from Hong Kong. We get a lot of questions like these not just because the payment of taxes is a critical government compliance component, but also because the type and amount of tax will affect your profitability. Most of these taxes are expressed as a percentage of revenues which is very helpful in computing your profitability. So, what are these taxes that you should watch out for?
If you've done some preliminary research you may have observed that there are many different taxes for different situations. This might not surprise you as governments around the world, including where you're from, usually find ways to tax anything and everything. After all, it's their primary source of revenue, funding, and budget.
Nonetheless, as a typical business owner, I’m quite sure that you're interested in the bottom line, i.e., what are the major taxes that I need to consider without getting bogged down by the details? Or, stated in another way, what taxes comprise almost 90% of all taxes payable?
Here is the bottom line:
25% Income Tax
Watch out for the usual income taxes. The rate is generally 25% of net income. In other words, you are allowed the usual business expenses deductions from your total gross income and it's only then that you apply the 30% tax.
12% Value-Added Tax (VAT)
This tax is taken from your gross sales. In general, every transaction will be subject to value-added tax and your only allowable deduction will be the value-added tax charged to you by your supplier. Note that it is not necessary that the value-added tax passed on by your supplier to you be directly related to the product you are selling. For example, if you're in the business of real estate leasing, you can credit against your total value-added tax due not only the value-added tax passed on to you for renovation and maintenance but also the value-added tax transferred to you by your airline and hotel for your business travel. In other words, your total value-added tax payable is an aggregate tax.
All the other taxes are of much smaller amounts and apply only to specific transactions. These details you can study later for your specific industry.
That’s the bottom line and big picture to guide you forward.
The Philippine taxing authority is the Bureau of Internal Revenue. They have a basic list of all the applicable taxes and you can access it here.
Finally, while on the topic of profitability, an important distinction must be made between taxes versus government license fees or permit fees.
The second major way that governments around the world try to raise money for their budgets is by imposing permit fees and license fees. While taxes refer to the government's share in any revenue, licenses and permit fees are charges for the privilege of doing a certain business or in doing business activity in a certain locality.
For example, each city will have its own amount of business permit fees. This is the way that a city generates additional income to fund itself in addition to its share of national government taxes.
This business permit fee is usually around 0.5% of gross revenue earned from any business conducted within the city. It is more expensive in some cities compared to others.
Thus, it will be important to check what the business permit fees are for the city in which your company will be operating out of. These business permit fees usually do not stray too far away from the said 0.5% of gross revenue but it's good to keep this in mind because no deductions are allowed against business permit fees.
Again, these fees are not a tax or share of income and so the usual business expense deductions do not apply.
The same logic applies to license fees. The license fee is the fee charged for the privilege of engaging in a certain line of business, for example, banking, insurance, transportation, and the like.
More often than not these fees need to be renewed annually. They are not as high as income taxes or value-added taxes but it's important to note that these fees should be factored into your cost of doing business so you can determine overall profitability.
The first place to look would be the government regulator of your particular industry. If your business is being regulated in your home country, then it is very much likely that there will also be the same type of regulation in the Philippines which will include license or permit fees.
We hope that this article has given you a better grasp of your tax situation as well as its real-world impact on your profitability.
Finally, as mentioned earlier, the question to which this post is a response is a very common question from potential foreign investors. In line with this, we will be producing an online resource that will address almost all of the common questions of foreign business owners wanting to explore doing business in the Philippines. All of these questions will be answered in just one convenient place with some examples and additional how-to guides. The information of this online resource will also be updated annually as government regulations do change every now and then. Please stay tuned for this.
Thank you.
About the Author
Atty. Noel C. Ducusin is an M&A lawyer who has advised boards, business owners, investors, and family offices on strategic transactions and business transformation for nearly three decades. As Director for M&A at DoingBusinessPH and Senior Partner at N. Ducusin & Partners Law Offices, he advises on mergers and acquisitions, strategic partnerships, capital raising, corporate restructuring, and cross-border investments, while helping international companies establish, invest, and grow in the Philippines. Beyond advising on transactions, he also helps create them by connecting investors, business owners, executives, and advisers whose strategic interests align, believing that many successful opportunities begin with a simple conversation. Through this blog, he shares practical, plain-English insights to help foreign investors, business owners, directors, and executives make better strategic decisions.
"Everything should be made as simple as possible, but no simpler." — Albert Einstein
Connect with him on LinkedIn to compare notes on strategic opportunities and future possibilities.