The tax system in the Philippines is quite difficult to grasp by small and medium business owners, professionals and other income earners, especially if they don’t have any basic knowledge in accounting and taxation. For big companies and corporations, they have the money to hire tax professionals and even create an accounting or tax compliance department inside their organization. But for some small business owners, who can’t afford to hire a tax consultant, bookkeeper or accountant, they are forced to do the tax compliance on their own – but doing that is such a troublous mess.
The local and national taxes
There are basically two types of taxes that are covered by the tax laws in the Philippines, namely the national taxes and local taxes. National taxes refer to the national internal revenue taxes imposed and collected by the national government through the Bureau of Internal Revenue (BIR), such as income tax, Value Added Tax (VAT) or percentage tax, excise tax, estate tax, capital gains tax, and documentary stamp tax. On the other hand, local taxes are the taxes imposed and collected by the local government units, such as real property tax, local business taxes, professional tax, amusement tax, and community tax.
Taxation on business
If you are doing business in the Philippines or practicing your profession in the country, you may be liable and required to pay both local and national taxes. For business owners, they are basically required to register or obtain a license with the local government and pay the applicable local business taxes for operating a business. The registration process and computation of taxes and licensing fees vary in different cities and municipalities. Here is a guide post on how to register your business with the local government or get a Mayor’s permit to operate a business.
Aside from paying the corresponding local taxes for your business, you also have to register with the BIR to obtain a certificate of registration and determine what types of internal revenue taxes are you required to file and pay to the government through the BIR. Here is a guide on how to register your business with the BIR. The usual taxes paid by a business are income tax (annual and quarterly), VAT or Percentage tax (either of the two, but not both), withholding taxes on compensation (for businesses which have employees), and expanded withholding taxes (for business which pay certain income payments like office rental, professional fees, etc.,).
The internal revenue taxes in the Philippines are governed by the National Internal Revenue Code or the Republic Act No. 8424 (Tax Reform Act of 1997, as amended), revenue issuances, BIR rulings and other applicable special laws on taxation.
The Bureau of Internal Revenue (BIR) is the government agency 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 (Sec. 2 of the National Internal Revenue Code of 1997).
Registration of business
Take note that businesses are not only registered with the local government unit (City or municipal Mayor’s office) and the BIR, where they are paying major taxes like local business taxes and internal revenue taxes. Businesses are required to register with other government offices depending on their type of operation or type of owner structure (i.e., proprietorship, partnership, corporation or cooperative). For example a corporation, aside from the BIR, is also required to be registered with the Security and Exchange Commission (SEC), Department and Industry (DTI), Social Security System (SSS), Philhealth, Home Development Mutual Fund (HDMF), Department of Labor and Employment (DOLE), and other applicable offices where the company is required to obtain a certificate of registration. For more information, check out this post on how to register a business in the Philippines.
Some important notes
Tax in the Philippines doesn’t only concern business owners, but it also involves almost every Filipino citizen and every resident of the country. Employees who are earning salaries and wages are usually taxed through withholding of their tax on compensation by their employers. Also, employees are not allowed to claim most of their expenses related to their employment as deductions to their taxable income, like transportation, communication and food allowance, unlike business owners who can claim an allowable deduction to income tax from their expenses that are directly related to their business.
The imposition of Value Added Tax and other indirect taxes on certain goods and services also affect most of us. Since VAT is a form of sales tax and an indirect tax, which may be shifted or passed on to buyers of goods, properties or services, consumers may shoulder VAT. This means that even the children who are buying and consuming candies, in which, price are subjected to VAT, will carry the burden of tax.
But tax is tax, and it is the lifeblood of our country. It is under the law of our land that deserves obedience. Thus, no matter how burdensome it is, we always have to respect it and do our duties as a good citizen or a faithful taxpayer.
For more information about taxation in the Philippines, you may visit the official website of the BIR, which is also our reference for this article. You may also browse our tax category page to find various posts about taxation in the Philippines, which may include guides and discussions on registration of business, computation of taxes, and preparation and filing of income tax returns.
Disclaimer: This article was written and published for informational use only. There may be other important information that we might have missed to discuss in relation to the topic discussed above. Furthermore, new and subsequent tax rulings, issuances and or laws in the future may render the whole or part of the article obsolete or inaccurate. Moreover, the content in this article is not provided to serve as legal, tax, or investment advice. Hence, we do not guarantee and is not liable for the accuracy or completeness of any information provided herein or in any outcome as a result for using this information.