Business Advisory and Tax Consulting

for companies doing business in the Philippines

Philippines Tax Incentives for Foreign Owned Businesses

Tax is always a concern for local and foreign investors. K&C is committed to addressing risks and identifying opportunities and will assist you in choosing a tax effective structure for your business, planning your inbound investment and market entry strategy in the Philippines, and help determine your eligibility for availing of concessions and investment incentives granted under Philippine law. Some tax incentives depend on the geographic location of a business. K&C will identify Philippines Special Economic Zones (PEZA) and IT buildings where businesses and individuals are allowed to avail of special tax breaks in Metro-Manila and other parts of the Philippines.

K&C will perform the following:

• Determine eligibility for PEZA or BOI
• Process all required documents for PEZA or BOI
• Identify tax risks
• Choose effective tax structure
• Address international & double taxation issues

Philippines PEZA - Philippine Economic Zone Authority

Enterprises registered with the Philippine Economic Zone Authority (PEZA) are entitled to a holiday from income tax and local taxes for three or eight years. After that, they are subject to 5% tax on gross income (sales less direct costs) in lieu of all local and national taxes. Enterprises that are registered with the Subic Bay Metropolitan Authority (SBMA) or Subic Bay Freeport Zone , which administers the economic zone established by the conversion of the former United States military base in Subic, are also subject to the special 5% tax, but are not entitled to tax holidays. The same benefits are accorded to qualified industries registered with the Clark Development Corporation and located in the Clark Freeport Zone .

To avail of the incentives offered by PEZA an enterprise must register with PEZA and locate their operation in one of the zones. PEZA registrants must generally be export-oriented, with enterprises located inside the zones required to export 100% of their production. In some cases PEZA may approve the sale of up to 30% of production in the domestic market. Full foreign ownership of a PEZA enterprise is allowed provided they are not engaged in activities that appear on the Foreign Investment Negative List. PEZA approval and specific incentives granted are on a case by case basis. Applicants must supply an application for providing information on capital structure, nationality of investors and a feasibility report in accordance with a PEZA prescribed format. Applicants should then expect fast turn around once the application is submitted.

Philippines BOI - Board of Investments

The Board of Investments (BOI) provides tax and other incentives registered entities that engage in activities identified as investment priorities or those which promote the general economic development of the Philippines and those that are exported oriented (where export is more than 50% of production or 70% if the enterprise is more than 40% owned by foreign investors). The BOI, in consultation with the public sector comes up with an Investment Priorities Plan listing these industries.

The main advantage for an eligible BOI registered firm are 3-8 year income tax holidays and 4-6 year exemption from local business taxes for pioneer and non-pioneer industries. To be eligible for BOI incentives foreign investors will need to have an equity investment in a Philippine corporation.

Pioneer and Non pioneer projects have different requirements. 100% foreign owned enterprises may avail of incentives if they engage in pioneer projects, export at least 70% of their total production or undertake projects less-developed areas of the country as identified by the BOI. These enterprises are obliged to attain 60% Filipino ownership within 30 years from registration unless they export or will be exporting 100% of their production. For enterprises engaged in non-pioneer projects, foreign ownership is limited 40%, unless the enterprise will export more than 70% of its annual production.

Applying for BOI requires submission of a notarized application indicating the type of projects, how the activity relates to those listed in the Investment Priorities Plan, the production capacity geared to export, the capital structure of the enterprise, and the nationality of its investors. In addition, the company must submit a feasibility report, containing five-year projected financial statements.

Philippines Taxes for Businesses

The Philippine government imposes income tax, VAT (value added tax), estate and donor’s tax, excise taxes, documentary stamp tax, and percentage taxes in the Philippines. Local governments impose local business taxes and real property taxes as well.

Philippines Income Tax

Foreign owned corporations are taxed only on Philippine source income. Corporate income is taxed when earned by the corporation and again when profits are received by shareholders. Inter-corporate dividends between domestic corporations or received from a domestic corporation by a resident foreign corporation are subject to 0% rate of tax. Depending on the business activity involved, the starting point for Philippine taxation is whether a foreign business has Philippine source income.

The Philippines also has several double taxation treaties with different countries, which relinquish taxing rights over business profits to the state of residence if no permanent establishment (“PE”) exists or should reduce the applicable rates of tax imposed on Philippine source income.

Generally, active business income earned by individuals is subject to graduated rates of tax between 5-32%. The active business income of Corporations, on the other hand is subject to a flat 35% rate. (the tax rate will be reduced to 30% in 2009). Passive income such as interest, royalties, and dividends are subject to final withholding taxes which are withheld at source. The applicable rates of final withholding tax vary depending on the type of income involved and the taxpayer.

A foreign owned company considered “doing business” in the Philippines must be licensed by the Securities and Exchange Commission (SEC) or will be considered a non resident foreign corporation and subject to tax a final tax of 35% of its gross (rather than net) income

Foreign and local businesses in the Philippines that qualify and are registered for tax incentives can avail of income tax holidays and this may be followed by a special tax rate of 5% in lieu of any and all taxes if the business is located in a Philippine Special Economic Zone (PEZA).

Philippines Tax Amnesty Act 2007 Articles >>

28th Floor Trident Tower
312 Sen Gil Puyat Ave
Makati City, Philippines
Office: (+63)2-753-1712
Mobile: (+63)921-760-8884
info@kittelsoncarpo.com