A Practical Guide to Business Taxes in the Philippines

Introduction

The Bureau of Internal Revenue, known as BIR, oversees national taxes under the National Internal Revenue Code. Local government units add a separate layer on top. That layer comes through local business tax, owed independently of anything filed with the BIR. Recent reforms have also changed how some of this gets administered. The Ease of Paying Taxes Act moved the Philippines toward a unified invoicing system. It also updated how VAT gets recognized on services.

Business taxes in the Philippines aren’t one filing. They’re a set of parallel obligations. Each has its own trigger, its own rate, and its own filing rhythm. A company that only tracks corporate income tax is missing most of the picture.

This guide covers what applies to a typical business outside a PEZA economic zone. Incentive-zone rules follow a separate framework entirely.

What Business Taxes Apply in the Philippines?

Business taxes in the Philippines generally fall into four categories. Corporate income tax applies to net taxable income. VAT or percentage tax applies to sales, depending on revenue size. Withholding tax applies to specific payments a business makes to employees, suppliers, and professionals. Local business tax applies at the city or municipal level, separate from anything owed to the BIR. Some businesses also owe documentary stamp tax, excise tax, or industry-specific levies on top of these four.

Corporate Income Tax and the Minimum Corporate Income Tax

The regular corporate income tax rate is 25% of net taxable income. A reduced 20% rate applies to domestic corporations meeting two conditions. Net taxable income must sit at or below PHP 5 million. Total assets, excluding land, must sit at or below PHP 100 million. Breaching either ceiling pushes the company back to the full 25% rate.

Resident foreign corporations pay a flat 25% on Philippine-source income. There’s no reduced-rate option for them. A separate Minimum Corporate Income Tax, known as MCIT, applies from a company’s fourth taxable year onward. It’s set at 2% of gross income. MCIT kicks in whenever that 2% figure exceeds the regular tax liability for the year.

Business taxes in the Philippines don’t stop at whichever rate looks lower on paper. A company computes both RCIT and MCIT every applicable year and pays whichever is higher.

Excess MCIT paid in a given year isn’t lost. It can be carried forward for three taxable years. During that window, it credits against regular income tax due, under rules set out in the National Internal Revenue Code. Annual returns are filed using BIR Form 1702, with the specific variant depending on the corporation’s tax profile. A corporation subject only to the regular rate uses a different form. One claiming tax-exempt status or a preferential rate uses another.

VAT or Percentage Tax: Which One Applies

Value-added tax sits at 12% on most sales of goods, services, and imports. Registration becomes mandatory once annual gross sales or receipts cross PHP 3,000,000. Below that threshold, percentage tax applies instead. The current rate is 3% of gross sales or receipts. Certain transactions qualify for a 0% VAT rate instead of the standard rate. This mainly covers exports and specific services rendered to companies operating outside the Philippines. As of 2026, the 12% VAT also extends to foreign digital service providers. This applies when they supply services to consumers inside the Philippines. It closes a gap that previously let some cross-border digital sales sit outside the system.

The two systems work differently. VAT lets a business claim input tax credits on eligible purchases. That reduces net VAT payable. Percentage tax offers no equivalent credit. It can still be deducted as an ordinary business expense when computing taxable income.

A business under the threshold can register for VAT voluntarily. This is usually done to access input tax credits. That election is generally irrevocable for at least three years. Shifting from percentage tax to VAT means several steps. BIR registration needs updating through Form 1905. Invoices need updating as well. Output VAT then applies to sales going forward.

Withholding Tax: Becoming a Collection Agent for the BIR

Withholding tax turns a business into a collection agent for the government. Payments to an employee, supplier, contractor, or professional can carry a withholding obligation. The business deducts the tax at source. It then remits that amount to the BIR on the payee’s behalf.

Expanded withholding tax applies to payments like professional fees and certain supplier contracts. It’s creditable. The payee can offset the withheld amount against their own income tax due. Withholding tax on compensation works differently. It applies to employee salaries, tied to the personal income tax brackets. Final withholding tax applies to specific passive income types, such as certain dividends. That version isn’t creditable at all.

Getting the rate or the category wrong is a common audit trigger. The applicable rate depends on the payment type and the recipient’s classification. It isn’t one flat percentage across every transaction. Correct withholding on compensation is also part of running payroll properly. It’s one reason a compliant hiring structure matters from the first payroll run.

Local Business Tax and Other Obligations

Local business tax runs on a separate track from anything owed to the BIR. Cities and municipalities impose it directly. It’s generally based on gross receipts. Rates are set by each local government unit, not by a single national schedule. A business typically renews its local business permit each year alongside this payment. Missing that renewal window can affect a company’s ability to operate legally at that location. That risk sits separate from any national tax consequence.

Documentary stamp tax applies to specific transactions and documents. That includes certain loan agreements, leases, and share transfers. The transaction itself triggers the tax, not income. This makes it easy to overlook until a financing or contractual event brings it into play. Depending on the industry, a business may also owe excise tax, customs duties, or franchise tax. These sit on top of the core four.

What Taxes Does a Business Pay in the Philippines?

A typical business in the Philippines pays corporate income tax on net income. It also pays either VAT or percentage tax on sales, depending on revenue size. Withholding tax applies to qualifying payments, and local business tax goes to the city or municipality. Some businesses also owe documentary stamp tax or industry-specific levies.

Business taxes in the Philippines rarely trip up a company because of one rate. The trouble usually starts at the interaction between categories. One example is assuming VAT registration status settles income tax treatment. Another is assuming a low local business tax bill means national obligations are covered. Neither assumption holds, since each category runs on its own rules and its own filing calendar. For businesses weighing incentive-zone registration instead of standard tax treatment, Galaxy’s guide to PEZA incentives covers that separate framework. Galaxy’s tax and accounting team in the Philippines handles registration, filing, and the ongoing compliance calendar across all four categories. If you’re setting up or reviewing your Philippines tax position, talk to our team about what applies to your business.