The Philippines is often an attractive choice for foreigners who want to start an offshore business.
Although it may still fall behind its neighbors like China and Japan, the Southeast Asian country is steadily experiencing a fast economic growth.
Investment-grade ratings have also been given to the country, which stands as proof of its progressive economic liberalization. With its strategic location and booming economy, the Philippines proves to be one of your best options if you are planning to start a business in Asia.
However, starting a business in the Philippines as a foreigner is complicated. Among many other things like business registration in the Philippines, the country’s taxation is something that you need to have a clear understanding of if you want your business to succeed.
Here is a quick guide to the country’s general rules and restrictions about taxation.
Taxation in the Philippines
A tax treaty is a bilateral agreement between two countries made to resolve issues of double taxation and tax evasion. This means, if you are a resident of Country A, who is currently earning an income (whether active or passive) on Country B (in this case, Philippines), the existing agreement will prevent you from getting involved in the issues mentioned above.
Tax treaties also give you tax relief, which is a deduction on the amount of tax that you owe. This includes tax exemption and entitlement to preferential tax rates based on the type of income that you earn.
Under the tax treaties of the Philippines, foreigners are given preferential tax rates as they might still be required to pay taxes in their home country where they are considered as a resident taxpayer.
These are the types of income that may be subject to tax exemption or preferential tax rates:
1. Preferential Tax Rates: Dividends, Interest, Royalties and Shipping and Air Transport.
2. Tax Exempt: Income for personal services, teachers, researchers, artists, athletes, students, trainees, directors fees, pensions, government service, gains from the sales of shares/alienation of property and independent personal services not rendered more than 183 days (depending on the provisions of the Double Taxation Agreement or DTA).
Note that tax relief is not automatic. As a rule, you are required to secure a BIR ruling to avail of a tax relief. The BIR ruling confirms that your transactions are eligible to preferential tax rates.
To secure a BIR ruling, you must file duly accomplished Tax Treaty Relief Application (TTRA) BIR forms 0901, along with the prescribed document attachments.
To see the complete list of countries in which the Philippines shares a tax treaty with, visit this site.
Philippine national taxes are divided into the following categories:
1. Corporate Income Tax
Resident foreign corporations (branches) are taxed on their net income from Philippine sources at the rate of 30 percent. A non-resident foreign corporation is accountable to a final withholding tax of its gross income (minus benefits and deductions) from Philippine sources at the rate of 30 percent.
A foreign business becomes a resident corporation when it is engaged in trade or business in the Philippines. It is licensed by the Securities and Exchange Commission (SEC) to do so.
2. Individual Income Tax
As a foreigner or a non-resident alien engaged in business in the Philippines, you will be taxed on your net income from the Philippines ranging from 5 percent to 32 percent. You will be considered as a non-resident alien engaged in business or trade if you have stayed in the country for more than 180 days during any calendar year.
3. Withholding of Taxes
Your taxes as a non-resident alien and an owner of a foreign corporation are withheld at source.
4. Fringe Benefits Tax
Fringe benefits tax refers to the benefits that you give to your employees supplementary to their salaries. This may come in the form of medical insurance, subsidized meals, house allowance, and the like. Fringe benefits tax is the tax imposed on these benefits.
In the Philippines, a final tax of 32 percent is imposed on the gross monetary value of the fringe benefits that you give to your employee. Fringe benefits tax, however, is not imposed when the fringe benefits are deemed necessary to the nature of your business.
5. Business Taxes
The Philippines has a number of business taxes. Here are the main ones that you should take note of:
• Value Added Tax (VAT) – Value Added Tax is a form of sales tax on consumption levied on the sale, barter, exchange, and lease of goods or properties and services in the Philippines and on the importation of the goods in the Philippines.
You are required to file VAT returns if the amount of your actual gross sales or receipts exceed one million nine hundred nineteen thousand five hundred pesos (PHP 1,919,500). You must file your monthly VAT declaration using BIR form 2550M.
• Excise Tax – Excise tax is a tax imposed on the production, sale, or consumption of a commodity in a country. There are two types of excise tax which are namely:
¤ Specific Tax – These are taxes imposed on goods based on their weight, volume capacity, or any other physical unit of measurement.
¤ Ad Valorem Tax – These are taxes imposed on goods based on their selling price or other specified value.
• Percentage Tax – Percentage tax is a form of business tax imposed on entities/transactions that are VAT-exempt and engaged in certain industries (international air/shipping carriers doing business in the Philippines, franchise grantees, and persons/companies doing life insurance business are some of them).
• Documentary Stamp Tax – This refers to the tax imposed on documents, instruments, loan agreements, and papers evidencing certain business transactions.
To efficiently keep track of the taxes you need to file, avail of quality accounting services that could help you with your taxes.
Foreign Exchange Regulations
The Bangko Sentral ng Pilipinas (BSP) regulates foreign exchange transactions in the Philippines. They consistently amend their rules to maintain a safe financial system. This also helps the country attract foreign investors to the local stock market.
1. Purchase and Sale of Foreign Exchange
Foreign exchange can be bought in the Philippines for free. Residents and non-residents alike can purchase foreign exchange (FX) from authorized agent banks (AABs), their subsidiary/affiliate forex corporations (AAB-forex corps), and other non-bank entities operating as foreign exchange dealers/money changers subject to specific requirements.
2. Foreign Trade Transactions
A wide range of merchandise can be imported into and exported from the Philippines, save for items that may impact health, safety, and national security.
Foreign exchange may be purchased by importers from AABs/AAB-forex corps as advance payment without BSP approval; however, it is still subjected to documentary requirements. On a similar note, AABs and AAB-forex corps can also sell foreign exchange for import transactions under a certain BSP arrangement.
Without prior BSP approval but under the standard BSP arrangement, payments for export may also be made.
3. Non-Trade Transactions
Non-trade transactions refer to foreign loans and foreign investments. Even without BSP approval, entities may sell foreign exchange to residents for payment of non-trade transactions. However, if the amount of foreign exchange exceeds $120,000, the purchaser will be required to present documentary requirements prescribed by the BSP.
Foreign Inward Investments
Registration of foreign investments with the BSP is optional. However, registration to BSP is mandatory when you need the foreign exchange to fund the repatriation of your capital and remit your profits and dividends.
As a foreign investor, starting a business in the Philippines may prove to be quite of an ordeal at first. Know your taxes well to make your business flourish, and soon, you will realize how it is all worth it.