Tax Responsibilities as a Startup in the Philippines

A Complete Guide to Navigating Philippine Taxation for Startups

Starting a business in the Philippines is an exciting journey, but it comes with its fair share of responsibilities—especially in terms of taxes. Whether you’re a local entrepreneur or a foreign founder launching your startup in Manila, Cebu, or Davao, understanding your tax obligations is critical for staying compliant with the Bureau of Internal Revenue (BIR) and building a financially sound business.

In this guide, we’ll walk you through the major taxes that startups must pay in the Philippines, explain when and how they’re due, and provide practical advice on staying compliant. We’ll also touch on the implications of hiring employees and scaling operations.

1. Understanding the Philippine Tax Framework

Before diving into specific taxes, it’s important to grasp the broader tax environment in the Philippines.

The Philippine taxation system is primarily governed by the National Internal Revenue Code (NIRC), which is administered by the Bureau of Internal Revenue (BIR). Startups, regardless of size, are expected to:

• Register with the BIR and obtain a Certificate of Registration (COR)

• Issue BIR-registered official receipts or sales invoices

• File monthly, quarterly, and annual tax returns

• Keep accurate accounting records

Failing to comply with BIR regulations can lead to penalties, surcharges, and even closure orders. Compliance should not be an afterthought—it’s a foundation of sustainable business operations.

2. Key Taxes That Startups Must Pay

Let’s explore the key tax types you’ll encounter as a startup in the Philippines.

2.1. Value-Added Tax (VAT)

Who Needs to Pay:
Businesses with annual gross sales or receipts exceeding ₱3,000,000 are required to register as VAT taxpayers.

Rate:
The VAT rate is currently 12% on the sale of goods, services, or lease of properties.

Reporting and Payment Frequency:

• Monthly (BIR Form 2550M) – Due on the 20th of the following month

• Quarterly (BIR Form 2550Q) – Due on the 25th of the month following the quarter

Optional VAT Registration:
Even if your revenues are below ₱3 million, you may voluntarily register for VAT to recover input VAT (taxes paid on purchases).

Non-VAT Registered Businesses:
If your revenues are below the threshold and you do not opt for VAT, you will be subject to percentage tax instead (discussed below).

2.2. Percentage Tax (Non-VAT Registered Entities)

Who Needs to Pay:
Startups with gross annual sales under ₱3,000,000 and not VAT-registered.

Rate:

• 1% for MSMEs until June 2025 under the CREATE Law (formerly 3%)

• Applies to sales/receipts that are not subject to VAT

Reporting and Payment:

• Quarterly using BIR Form 2551Q

• Due on the last day of the month following the end of the quarter

2.3. Income Tax

Who Needs to Pay:
All registered businesses, regardless of income level or entity type.

Corporate Income Tax Rates (under the CREATE Act):

• 25% for corporations with net taxable income above ₱5 million or total assets over ₱100 million

• 20% for smaller businesses (net income ≤ ₱5 million AND assets ≤ ₱100 million)

Optional for Startups:
For the first three years, some startups might qualify for tax holidays under PEZA, BOI, or startup incentives from DTI. Check if you’re eligible.

Filing Requirements:

• Quarterly Income Tax Return (Form 1702Q): Due within 60 days after the end of the quarter

• Annual Income Tax Return (Form 1702-RT): Due on or before April 15 of the following year

2.4. Withholding Taxes

Startups that hire staff, engage contractors, or lease property are required to withhold taxes on behalf of the government and remit them to the BIR. The most common types are:

2.4.1. Withholding Tax on Compensation (WTC)

Applies to employee salaries.

• Rate: Based on the graduated income tax table

• Filing: Monthly (BIR Form 1601-C) and Annual (BIR Form 1604-C)

2.4.2. Expanded Withholding Tax (EWT)

Applies to certain payments like rentals, professional services, or commissions.

• Rate: Typically ranges from 2% to 15% depending on the transaction

• Filing: Monthly (Form 1601-E) and Annual (Form 1604-E)

3. Deadlines and Frequency: What to File and When

Here’s a simplified calendar of common tax deadlines:

Missing deadlines results in:

• 25% surcharge

• 12% interest per annum

• ₱1,000 compromise penalty per return

4. BIR Registration Process: Do It Right

Upon starting your business, you must register with the BIR within 30 days of securing your business permit (from DTI, SEC, or LGU).

Steps:

1. Secure your TIN (Taxpayer Identification Number)

2. Fill out BIR Form 1901 (Sole Prop) or 1903 (Corp/Partnership)

3. Pay registration fee (Form 0605) – ₱500 annually

4. Buy and register books of account

5. Apply for ATP (Authority to Print) invoices/receipts

6. Display BIR Certificate of Registration (COR) at your premises

5. Accounting Records & Bookkeeping: Don’t Skip This

Startups are required to maintain proper books of accounts, either manual or computerized. This includes:

• General journal & ledger

• Cash receipts and disbursement books

• Subsidiary ledgers (if applicable)

Small businesses often outsource this to freelance accountants or BIR-accredited tax agents. Accounting software like Xero, QuickBooks, or JuanTax is also widely used in the Philippines.

6. Tax Implications of Hiring Employees

Once you start hiring, you take on more tax responsibilities:

Payroll Taxes:

• Withholding tax on compensation

• SSS, PhilHealth, and Pag-IBIG contributions (split between employer and employee)

• Annual Alpha List filing

Registration:

You must register as an employer with the following agencies:

• BIR (for WTC)

• SSS

• PhilHealth

• Pag-IBIG Fund

Non-remittance of employee contributions is a criminal offense and can lead to serious penalties.

7. Common Mistakes to Avoid

Many startups run into issues with tax compliance because of the following:

• Late BIR registration

• Failure to renew COR annually

• Not issuing official receipts

• Forgetting to withhold and remit taxes on services

• Mixing personal and business accounts

Early-stage companies should hire a tax advisor or freelance bookkeeper even before revenue starts. This is an investment in your business’s future credibility and operational health.

8. Scaling Locally? Tax Complexity Increases

As you grow, tax compliance becomes more complex. Consider the following:

a. Branch or New Office Registration:

You must register every branch with the BIR and local government unit (LGU).

b. BIR Audit Risk:

Larger revenues attract attention. BIR may audit your business to ensure proper reporting. Keep organized, accurate books.

c. Tax Incentives and Holidays:

Look into PEZA, BOI, or DTI startup incentives. These may provide multi-year tax holidays, reduced rates, or customs perks.

9. Should You Go Corporate or Freelance?

In the Philippines, many startups begin as sole proprietors or freelancers to simplify tax filings. However, as you scale, corporate registration may be more advantageous for:

• Tax planning

• Raising investment

• Limiting liability

• Qualifying for government grants

Work with a lawyer or accountant to determine the best structure.

10. Online Tools and Resources

Here are a few resources that can help:

• eBIRForms – Free BIR tax form filing tool

• EFPS – Electronic Filing and Payment System (for larger businesses)

• JuanTax – Local tax automation software

• BIR Website – www.bir.gov.ph

Conclusion: Tax as a Startup Responsibility

Startups in the Philippines face a complex tax environment, but it’s manageable with the right preparation. From VAT to withholding tax, every obligation you meet builds your reputation and paves the way for sustainable growth.

While it may be tempting to delay tax compliance, especially in the pre-revenue stage, doing so can cost you dearly later in penalties, audits, or missed opportunities (like grants or partnerships). Hiring a professional early or using digital tools can drastically simplify the process.

In short: Take your taxes seriously. Your future investors, customers, and partners will thank you.