Corporate Income Tax in Philippines: Rates & Incentives

This guide aims to provide a complete overview of the corporate income tax system in the Philippines.

In the last two decades, the Philippines has significantly liberalised its regulations and policies to attract foreign direct investment (FDI) inflows. The country views FDI as a prospective source of employment and exports and residual benefits from the technology and knowledge that FDI inflows bring.

As a result, the government has offered numerous investment incentives to influence the investors’ site preferences. The investment incentives include reduced tax rates on profits, import duty exemptions, tax holidays, and accounting rules enabling accelerated depreciation and loss carry forwards for tax purposes.

Corporate income tax rate and basis of taxation

Philippine corporations are taxed on worldwide income, but non-resident corporations are only taxed on income generated in the Philippines.

A foreign corporation with a branch in the Philippines is subject to taxation on the income generated in the Philippines. Branch taxable income is calculated in the same way as subsidiary taxable income.

Effective from July 1, 2020, Philippine corporations are taxed at a rate of 25% (reduced from 30%), except for corporations having net taxable revenue of less than 5 million PHP and total assets of less than 100 million PHP, which is taxed at a rate of 20%.

Tax	Tax rates
Corporate income tax	20% – 25%
Branch office tax	25%, plus additionally 15% tax on after-taxation profits remitted to foreign headquarters
Capital gains tax	Generally, corporate income tax rate

Alternative minimum tax

Beginning in the fourth taxable year of operations, domestic and resident foreign corporations are subject to a minimum corporate income tax (MCIT) of 2% of gross income, except for 1 July 2020 to 30 June 2023, when the MCIT is 1%.

When a corporation has no or negative taxable income, or when the MCIT is greater than the corporation’s normal income tax liability, the MCIT is imposed in each quarter of the taxable year. Any MCIT higher than the regular income tax may be carried forward and credited against the normal income tax for the following three taxable years.

Taxable income

Corporate income tax is levied on a corporation’s profits, typically comprised of business and trade income. In computing taxable income, standard business expenses can be deducted.

Taxation of capital gains

Generally, capital gains are taxed as regular income. However, gains achieved by a domestic corporation or a resident foreign corporation on the sale of shares in a domestic corporation not traded on a stock exchange are subject to a 15% capital gains tax.

Gains on the sale of stock exchange-listed and traded shares are taxed at 0.6 % of the gross selling price. Gains from the sale of non-business real estate are subject to a final withholding tax of 6% based on the higher the sales price or the fair market value.

Dividends taxation

Dividends received by foreign (resident) or domestic corporations from a domestic corporation are not subject to taxation.

Exempt are foreign-sourced dividends that are reinvested in the domestic corporation’s business operations by the end of the next taxable year following the receipt and used only to fund working capital requirements, investments in domestic subsidiaries, capital expenditures, dividends payments, and infrastructure projects.

The domestic corporation must also own at least 20% of the outstanding shares of the foreign corporation for a minimum of two years at the period of dividend distribution.

Losses

Unless the taxpayer qualifies for a tax credit or exemption, losses can be carried forward three years. When a company’s ownership undergoes a substantial change, losses may not be carried forward. The carryback of losses is not allowed.

Rulings

At the taxpayer’s request, the tax authorities will provide a ruling on the tax ramifications of a transaction.

Year of assessment and corporate income tax return filing

The accounting period must correspond to a 12-month fiscal year but may or may not match the calendar year. The fiscal year for most Philippine companies ends in December or March.

For corporate income tax and value-added tax (VAT) purposes, a Philippine head office and its Philippine branches may file consolidated returns; otherwise, consolidated filings are not permitted. Each corporation must file a separate return.

Filing and payment

The yearly income tax return must be filed on or before the 15th day of the fourth month following the end of the taxpayer’s taxable year.

Penalties for late filing

Late payments are subject to a surcharge of 25% of the amount due and the interest of 12% per year on the unpaid amount of tax until it is fully paid. Based on the tax due, a compromise penalty (in place of imprisonment) is imposed (exclusive of the 25 % surcharge and applicable interest).

Tax relief & exemptions

Tax relief includes tax exemptions or preferential tax rates available on specific types of income, such as interest, dividends, and royalties.

Tax incentives available

BOI incentives

The following incentives are available to businesses who register with the BOI under the 1987 Omnibus Investments Code (Executive Order or EO 226), subject to specific requirements and conditions:

Fiscal incentives

Six-year income tax holiday (ITH) for pioneer enterprises and four years for non-pioneer firms. If a non-pioneer organisation is located in a less developed area, it is entitled to six years of ITH. Businesses situated in Metro Manila will not be granted ITH unless they are:

Within a government industrial estate
Service-type companies with no manufacturing facilities
Power generating plants; or
Exporters with expansion projects
Tax credited on supplies, raw materials, and semi-manufactured products
Additional deduction from taxable income for the labour expense
Additional deduction from taxable income for necessary and major infrastructure works

Non-fiscal incentives

Some non-fiscal incentives are also available to registered businesses, including:

foreign national employment
Guaranteed repatriation of foreign investments and earnings
Consigned equipment importation for an unlimited period subject to the posting of a reexport bond

PEZA incentives

The PEZA is responsible for operating, administering, managing, and developing Special Economic Zones or eco zones under the Special Economic Zone Act of 1995.

The above-mentioned ITH incentives will be available to businesses operating in eco zones. PEZA-registered exporters are also excluded from paying taxes and duties on capital equipment, raw materials, and other products directly related to their registered business.

Furthermore, PEZA-registered organisations will be liable to a final tax at a preferential rate of 5% of their gross income generated instead of all other local and national taxes.

Other incentives

Two other major economic zones are created under two separate special laws – Cagayan Economic Zone Authority (CEZA) and Tourism Infrastructure and Enterprise Zone Authority (TIEZA).

To learn more about these types of incentives, see Tax incentives for the Philippine businesses.

Deductible business expenses

Under the National Internal Revenue Code of the Philippines, valid business expenses may be deductible from the gross income to decrease a taxpayer’s taxable income legally. In this regard, the allowable deductions become tools for taxpayers to equitably estimate the net income from their respective business undertakings.

As a rule, an expense can be deducted from the income if the following conditions are met:

Expenses must be ordinary and necessary
Expenses must have been incurred or paid during the taxable year
Expenses must have been incurred or paid in the trade or business of the taxpayer
Expenses must be proven true by receipts, records and other relevant papers

If the expense is subject to withholding tax, the same must be paid and submitted to the Bureau of Internal Revenue (BIR).

The following are examples of standard allowable deductions from gross income under the National Internal Revenue Code of the Philippines:

Bad debts
Depletion
Depreciation
Taxes
Ordinary and Necessary Expenses
Interest
Pension Trust Contributions
Research and Development Costs
Charitable and other contributions
Losses

These deductions are available to corporate taxpayers if the corporations are not non-resident foreign corporations. If they do not choose to avail of the Optional Standard Deduction (OSD) of forty per cent (40%) of the gross income. It is worth mentioning that the income of non-resident foreign corporations is taxed at gross. Thus, they are not allowed any deduction.

Double tax treaties

The Philippines has existing tax treaties with several countries (including the United States, the United Kingdom, Singapore and Canada) that provide tax relief on income generated by foreign or local residents of the Philippines from sources within their respective territories.

Conclusion

Filing and paying corporate income tax accurately and on time each year is a must for companies in the Philippines. However, this might be challenging without knowing the local law landscape and understanding the potential pitfalls.

To ensure your corporate income tax filings are timely and accurate, we recommend seeking guidance from Acclime. Our tax experts will assist you throughout the process and assure you that your tax complies with Philippine law.

Corporate Income Tax in Philippines: Rates & Incentives | Acclime (2024)