What Business Owners Should Know About Taxes in the Philippines

Starting a business in the Philippines is challenging, especially when navigating taxes. Entrepreneurs often find themselves overwhelmed by the complexities of tax compliance, facing pitfalls like missed deadlines, incorrect filings, and poor record-keeping.

However, understanding and managing taxes is crucial for sustainable business success. Tax compliance helps avoid legal issues, builds credibility, opens new opportunities, and contributes to a stable economy.

In this article, we will explore the essential knowledge Filipino business owners need to manage this vital aspect of their journey effectively.

Understanding the Philippine Tax System

Let us now delve into an overview of the Philippine tax system, exploring the key components businesses must navigate.

We start with the Bureau of Internal Revenue (BIR). It is mandated by law to assess and collect all national internal revenue taxes, fees, and charges, and to enforce all forfeitures, penalties, and fines connected therewith, including the execution of judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts.

To simplify the tax process, the Tax Code categorizes taxpayers into different groups:

As to kind

1. Individual Taxpayers
   • Residents (citizens and aliens)
   • Non-residents (citizens and aliens)
2. Corporations
   • Domestic Corporations (organized under Philippine laws)
   • Resident Foreign Corporations (foreign corporations engaged in business in the Philippines)
   • Non-resident Foreign Corporations (foreign corporations not engaged in business in the Philippines but earning Philippine-sourced income)
3. Trusts and Estates
   • As to the level of gross sales for a taxable year
     • Micro Taxpayers are those with gross sales of less than PHP 3 million
     • Small Taxpayers are those with gross sales of between PHP 3 million and less than PHP 20 million
     • Medium Taxpayers are those with gross sales of between PHP 20 million and less than PHP 1 billion
     • Large Taxpayers are those with gross sales of PHP 1 billion and above

Essential Taxes Every Filipino Business Owner Must Know

1. Income Tax

Income Tax is a tax on a person’s income derived from the practice of their profession, engagement in trade or business, or on the pertinent items of gross income. It applies to individuals, corporations, and withholding agents with specific rules and rates.

Corporate income tax is generally 20% for companies with net taxable income not exceeding PHP 5 million and total assets up to PHP 100 million.

The deadline for filing income tax returns for individuals and corporations is typically on April 15 of the following year, with quarterly and annual filing requirements depending on the taxpayer’s classification and income type.

Conversely, corporations that pay quarterly income tax must file quarterly returns within 60 days after the end of each taxable quarter.

2. Value-Added Tax (VAT)

VAT is imposed on the exchange, leasing, or selling of goods, services, and properties. VAT is also taxed on goods imported into the country.

VAT is considered an indirect tax, as the seller is the taxpayer for a transaction and is responsible for filing and remitting VAT payments to the BIR. However, the buyer carries the financial burden (the cost) of the VAT payment on the specific transaction.

The following entities are legally obliged to register for VAT and file and declare their VAT returns:

• VAT-registered companies or individuals involved in selling, leasing, exchanging goods or properties, and rendering services if the actual gross sales or receipts total up to PHP 3,000,000
• Businesses or individuals who voluntarily registered as VAT taxpayers, even if their gross sales or receipts did not meet the VAT aggregate sum of PHP 3,000,000
• Businesses or individuals that import goods

In the Philippines, VAT returns are filed either monthly or quarterly. Monthly returns are submitted using BIR Form 2550 M and must be filed by the 20th of the month following the reporting period.

On the other hand, quarterly returns are filed with BIR Form 2550Q and are due by the 25th day of the month after the quarter ends.

Suppose a taxpayer fails to file the necessary returns or provide required information by the due date. In that case, they may face an administrative penalty of PHP 1,000 for each instance of non-compliance.

However, if it can be demonstrated that the failure was due to a reasonable cause and not willful neglect, the penalty may be waived. The penalties for such failures within a taxable year cannot exceed PHP 25,000.

3. Percentage Tax

A percentage tax is a business tax imposed on persons or entities that sell or lease goods, properties, or services during trade or business whose gross annual sales or receipts do not exceed PHP 3,000,000 and who are not registered for VAT.

It is a flat-rate tax calculated at 3% of the gross sales or receipts, applied instead of VAT for qualifying small businesses and certain professionals.

The tax is filed quarterly using BIR Form 2551Q, with deadlines on or before the 25th day after the end of each quarter. Notably, under the CREATE Law, the percentage tax rate was temporarily reduced to 1% from July 1, 2020, to June 30, 2023, but reverted to 3% starting July 1, 2023.

4. Other Taxes & Mandatory Contributions

Withholding Tax

Withholding tax is a mechanism where the payer or withholding agent deducts a certain percentage of tax from income payments at the source and remits it directly to the BIR on behalf of the payee.

The withholding tax rates vary depending on the nature of the income and the recipient. Standard rates include 1 to 2% for Expanded Withholding Tax on payments to suppliers and 10 to 25% for Final Withholding Tax on passive income or payments to non-residents.

Filing deadlines for withholding tax returns depend on the type, but generally require monthly or quarterly submission, ensuring timely remittance and compliance with tax regulations.

Local Business Taxes 

Local Business Tax (LBT) in the Philippines is a tax imposed by Local Government Units (LGUs) on businesses operating within their jurisdiction, calculated based on the gross sales or receipts of the previous fiscal year.

Rates vary by locality but generally do not exceed 3% of gross sales, making it a significant local revenue source.

LBT payments are typically due annually on or before January 20. However, some LGUs allow quarterly payments, and compliance with these local taxes is essential to avoid penalties and maintain good standing with local authorities.

SSS, PhilHealth, Pag-IBIG (if employing staff)

Businesses that employ staff must also contribute to several mandatory government social programs: the Social Security System (SSS), PhilHealth, and the Pag-IBIG Fund.

For 2024 and beyond, SSS contributions total 14% of the employee’s monthly salary credit, with employers paying 9.5% and employees 4.5%, capped at a salary of PHP 30,000.

PhilHealth premiums have increased to 5% of the monthly salary, shared equally between the employer and the employee.

In comparison, Pag-IBIG contributions doubled in 2024 to 2% from both employer and employee, based on a monthly fund salary that can now go up to PHP 10,000.

Common Tax Exemptions and Incentives for MSMEs

Barangay Micro Business Enterprises (BMBE)

The “BMBEs Act of 2002” encourages the formation and growth of BMBEs by granting them incentives and other benefits.
A BMBE is any business enterprise producing, processing, or manufacturing products, including agro-processing, trading, and services, with total assets of not more than PHP 3 million. Such assets shall include those arising from loans, but not the land on which the plant and equipment are located.

Registered BMBEs can avail of the following incentives:

• Income tax exemption for income arising from the operation of the enterprise;
• Exemption from the coverage of the Minimum Wage Law (BMBE employees shall be entitled to the same social security and health care benefits as other employees);
• Priority to a special credit window set up specifically for the financing requirements of BMBEs; and
• Technology transfer, production and management training, marketing assistance programs for BMBE beneficiaries;

Tax incentives for PEZA-registered businesses

These are the incentives PEZA provides its registered enterprises under the Special Economic Zone Act of 1995 and the Corporate Recovery and Tax Incentives for Enterprises Law.
PEZA has the authority to approve or disapprove the grant of incentives to registered projects or activities with investment capital of PHP 1 billion and below.

1. Export enterprises may be granted an Income Tax Holiday (ITH) of four (4) to seven (7) years, depending on the location and industry priorities*
2. After ITH, export enterprises can avail themselves of 5% Special Corporate Income Tax OR Enhanced Deductions for 10 years.
3. Tax-and-duty-free importation of capital equipment, raw materials, spare parts, or accessories
4. VAT exemption on importation and VAT zero-rating on local purchases for goods and services directly or exclusively used in an export enterprise’s registered project or activity for the registration period.
5. Domestic sales allowance of up to 30% of total sales
6. Exemption from payment of local government taxes and fees for the duration of the period of availing of the 5% SCIT incentive

Staying on Track with Key Tax Filing Deadlines in the Philippines

At a glance, here are the tax filing deadlines that you must know in the Philippines:

How to Use Digest PH and Digest AI for Quick Tax Lookups

In the Philippines, new technology is significantly changing how businesses handle their tax responsibilities. A report from Thomson Reuters revealed that 75% of corporate tax teams focus on using Artificial Intelligence (AI) to boost efficiency and accuracy in handling taxes.

Now, navigating the complexities of Philippine tax regulations becomes significantly more manageable with Digest PH and its integrated legal AI chatbot, Digest AI.

Imagine you must understand the latest Bureau of Internal Revenue (BIR) regulations on a specific industry. Digest PH’s powerful search engine lets you quickly locate relevant BIR Revenue Regulations, Revenue Memorandum Circulars, and other issuances using keywords like the industry name or specific tax types.

Once you have found these documents, Digest AI can further simplify your understanding. You can ask Digest AI direct questions about the regulations, such as “What are the documentary requirements for claiming this exemption?” or “What is the deadline for filing this particular return for the current year in the Philippines?”.

Digest AI will then provide concise answers, referencing the specific legal provisions in Digest PH’s extensive database.

Furthermore, by exploring Digest PH’s organized collection of tax-related laws and Supreme Court decisions, business owners can gain a solid grasp of the essential taxes they must comply with, including income tax, value-added tax, withholding taxes, and other local or industry-specific obligations, ensuring they remain on the right side of the law.

Digest PH and Digest AI make legal research dramatically easier for non-lawyers by transforming complex tax regulations and legal jargon into clear, accessible information. Instead of spending hours sifting through dense BIR issuances or struggling to interpret technical language, business owners can simply ask questions and receive straightforward, reliable answers tailored to their needs.

These AI-powered tools automate the search, classification, and explanation of tax rules, deadlines, and exemptions, removing much of the guesswork and confusion that typically frustrate entrepreneurs without legal backgrounds. This saves valuable time and empowers users to make informed decisions and confidently comply with ever-changing Philippine tax laws.

Final Thoughts: Be Proactive, Not Reactive

Understanding taxes is not just a requirement—it is a decisive step toward becoming a responsible and successful business owner in the Philippines. When you take the time to learn about your tax obligations, you protect your business from unexpected penalties and create a solid foundation for growth.

Luckily, you do not have to face tax complexities alone. With innovative tools like Digest PH and Digest AI, accessing clear, reliable tax information has never been easier.

By staying proactive and using these resources to keep up with the latest regulations, you are setting your business up for lasting success and peace of mind. Take charge today—your business deserves nothing less!