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Navigating the world of tax compliance for businesses in the Philippines can feel daunting. Let this short guide shed some light on the topic.
Who wants to spend their day learning about taxes? For business owners unfortunately, it is obligatory. From deductions to exemptions, it’s important to know what’s required to avoid any penalties and keep your operations running smoothly. The last thing you want is a heavy fine for an avoidable mishap. But where do you begin?
In the Philippines, tax compliance for businesses starts with the basics: a breakdown of key regulations and processes you need to follow. After all, getting a handle on your financial obligations is not just a legal necessity—it's also a smart move for long-term growth and success.
1. Value-Added Tax (VAT)
VAT is a common tax that most small businesses will encounter. It's a charge on the sale of goods, services, and imports, usually at a 12% rate. If you make less than ₱3 million a year, you can opt to be a non-VAT taxpayer. This means you'll pay a percentage tax instead of VAT. It's simpler to file taxes this way, but it's important to consider your business's growth plans before deciding on anything.
2. Income Tax
All businesses in the Philippines, big or small, must pay income tax on their profits. The rate depends on whether you're a corporation or an individual. Individuals, like sole proprietors, have a graduated tax rate (so the more you earn, the higher it will be). The TRAIN Law sets the individual rates between 0% and 35%.
3. Percentage Tax
For small businesses that don’t pay VAT, you might need to pay a percentage tax. This is usually 3% of your quarterly sales. However, there was a temporary break on this. The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act lowered the percentage tax to 1% until 2023. This was to help struggling companies during the pandemic.
The TRAIN Law made things easier for small businesses. One big change was that those who make less than ₱250,000 a year don't have to pay income tax. This is a huge help, especially startups because they’re still setting out.
Ventures that are classified as Barangay Micro Business Enterprises (BMBEs) get a tax break, too. They don't have to pay income tax if they have assets worth ₱3 million or less (not including land). Even though they don't pay income tax, BMBEs still need to follow other rules, like paying VAT or percentage tax, depending on how they're registered.
1. Books of Accounts: This can include a general ledger, cash receipts journal, cash disbursements journal, and purchase journal. The BIR requires these books to be registered and stamped.
2. Sales Invoices: Both VAT-registered and non-VAT-registered businesses must ensure that these invoices are BIR-approved and properly filed.
3. Purchase Invoices: Entrepreneurs should keep copies of all invoices they get from suppliers. These documents are crucial for figuring out input taxes if you're registered for VAT, as well as for tracking expenses.
4. Bank Statements and Deposit Slips: Bank records, such as monthly statements and deposit slips, provide a detailed history of your financial transactions. These are essential for reconciling accounts and confirming that income and expenses are accurately reflected in your books.
5. Payroll Records: For those with employees, payroll records must be kept, including proof of tax withheld from employee salaries and other compensation.
6. BIR Registration and Permits: Keep copies of your BIR Certificate of Registration (Form 2303), annual registration fee payments, and any other relevant permits, such as your Authority to Print (ATP) invoices/receipts, as they are necessary for compliance and reference during audits.
**For individuals wondering how to get Form 2303, it will be issued to you by your Revenue District Office (RDO) together with other applicable documents AFTER you have completed filing BIR Form No. 1901 and have paid the required Documentary Stamp Tax (DST).
Use the NewBizReg portal for more information and convenient filing online. For a list of all BIR forms, visit their official website.
7. Tax Returns and Supporting Documents:
Maintain copies of all tax returns filed, including income tax, VAT, percentage tax, withholding tax, and documentary stamp tax returns. These should be accompanied by supporting papers, such as payment slips (BIR Form 0605), to verify that the correct taxes were paid.
8. Expense Records and Receipts: These are business-related expenses, such as utility bills, office supplies, and rental payments. Proper documentation of these expenses is vital for claiming deductions and reducing taxable income.
Disclaimer: This article is for general knowledge only. It's not meant to be legal advice. Tax laws and regulations can vary significantly based on jurisdiction and individual conditions. If you have accounting or legal concerns, please consult a qualified finance professional or legal advisor.
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