An easy guide to

taxation for startup

entrepreneurs
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“Taxation works as easy as RFP,” says Rhea Alamodin from the Bureau of Internal
Revenue (BIR) during a recent entrepreneurship seminar facilitated by the Department of
Trade and Industry--Bureau of Micro and Small Medium Enterprise Development (DTI-
BSMED). She explained tax processing from registration to filing, down to actual
payment of tax return rates.

‘Register-File-Pay’ or RFP is BIR’s latest campaign that provides better awareness to

taxpayers on their responsibility to pay taxes. Moreover, this unified drive targets a P1.4
trillion-tax collection by the end of this year.

Register

If you are an individual who wishes to establish your own business or a self-employed
professional, it is a must go to your Revenue District Office (RDO) to register.

To register, you should have to first accomplish the following important documentary
requirements: 1) Birth Certificate issued by the National Statistics Office (NSO); 2)
Mayor’s Permit; 3) DTI Certificate of Business Name; 4) Professional Regulation
Commission (PRC) ID; and 5) Payment of Professional Tax Receipt (PTR).

Having all these document files at hand, submit them together with a filled up BIR Form
1901 or the Tax Treaty Relief Application to the RDO of your town or city that has
jurisdiction over your business’ location.

There is a registration fee of P 500.00 to the Authorized Agent Bank (AAB). Use the BIR
Form 0605 payment form for this transaction. You should also attend the taxpayer’s
briefing at the RDO.

A Certificate of Registration will be issued

to you. This is your access if you have to
file tax return and pay. Do not forget to ask
for a receipt and then fill up BIR Form
1906 (Authority to Print). Register books
of accounts. Have your journal/ledger/subsidiary books of accounts stamped by your
registered RDO.

File
Tax return filing should be made even if there is no payment to be made. There are three
types of tax returns, so don’t get confused, especially, on the deadlines.

Percentage tax. Percentage tax return is filed every 20th of the month with an
accomplished BIR Form No. 2551Q.

Income tax. This is due monthly, on the 20th day, and quarterly, on the 15th of April,
August, and November. Income tax is required for self-employed individuals, real estate,
and trusts, including those with both business and compensation income. For the
quarterly filing, you are required to fill up BIR Form No. 1701Q. For annual income tax
filing, you are required to have BIR Form No. 1701.

Value added tax. You need to file for a value added tax return on or before the 20th day
of every following month. For a quarterly basis, filing is due on the 25th of the months of
April, August, and November.

Pay

Here is where the computation comes in for your tax payables.

Income tax. The rates may range from 5% to 32%. However, this is not yet fixed so it
may vary depending on your net taxable income. The income tax table is provided at the
back of your ITR.

Allowable deductions. The method of allowable deduction allows taxpayers (businesses

or individuals in professional practices) to choose between optional and itemized
deductions. For the optional standard deduction (OSD), trimming of an amount not
exceeding 40% of gross sales or receipts is
allowed.
On the other hand, for the itemized deduction, all the ordinary and necessary expenses
paid or incurred during the taxable year are deducted from the gross income. It includes
employees’ benefits (salary and wages), employers’ share (for SSS, Medicare, HDMF,
and other contributions), rentals, insurance expenses, and other expenses stated in the Tax
Code.

Personal exemptions. Personal, living, or family expenses are items not deductible. This
means that there is no deduction from your gross income, unless otherwise proven with
substantiated evidence.

Expanded Withholding Tax (EWT). The Expanded Withholding Tax (EWT) serves as an
advance payment of the income tax of the income recipient. It can be credited against
income tax due. In other words, this is only partial and NOT the full payment of the
income tax.

Businessmen, especially small entrepreneurs, are often times challenged with the dilemma of how to
generate more income and minimize their expenditures. It is in recognition of this that Republic Act (RA)
No. 9178, otherwise known as the "Barangay Micro Business Enterprises (BMBEs) Act of 2002", was
enacted.

The policy underlying RA No. 9178 is a noble one. RA No. 9178 was crafted to encourage the formation
and growth of BMBEs, which effectively serve as seedbeds of Filipino entrepreneurial talents, and to
integrate those in the informal sector with the mainstream economy. Its most salient feature pertains to
the tax incentives granted to BMBEs, specifically the exemption from tax of the income arising from the
operation of the enterprise; exemption from or reduced rates of local taxes, fees and charges; and
exemption from gross receipts tax (GRT).

How to register

One can register as a BMBE if it is a business entity or enterprise, whether operated as a sole
proprietorship or a corporation, partnership, cooperative or association, organized/incorporated and
existing under Philippine laws and is: (a) engaged in the production, processing or manufacturing of
products or commodities, including agro-processing, trading and services, and which activities are
barangay-based and micro-business in nature and scope; and (b) whose total assets, real or personal,
inclusive of those arising from loans but exclusive of the land on which the particular business
entity’s office, plant and equipment are situated, shall not be more than P3,000,000.

The application for registration as a BMBE, or BMBE Form 01, should be accomplished in triplicate and
filed with the Office of the City or Municipal Treasurer where the principal place of business of the BMBE
is located. The application should be processed within fifteen (15) working days upon submission of
complete documents, otherwise, the BMBE shall be deemed registered. If the business entity or
enterprise is found to be eligible, the Office of the City or Municipal Treasurer will register the business
entity or enterprise as a BMBE and issue a Certificate of Authority (CA), which shall be effective for a
period of two years, and renewable for a period of two (2) years for every renewal. The Office of the
Treasurer shall issue the CA promptly and free of charge, unless a fee, not exceeding One Thousand
Pesos (P1,000), is imposed by the local government unit concerned through a properly enacted
ordinance.

Tax incentives

The income of a BMBE arising purely from its operations is exempt from income tax. To avail of such tax
incentive, all that is needed is to register the BMBE with the BIR Revenue District Office (RDO) where the
principal office or place of business of the BMBE is located. If the enterprise is currently registered with
the BIR, the BIR shall record its registration as a BMBE and shall correspondingly amend the registration
certificate. On the other hand, if the BMBE has not yet been registered, the BMBE shall register for each
type of internal revenue tax, except income tax, but including withholding taxes for which it is liable. If a
BMBE is also entitled to exemption from income tax under any law other than RA No. 9178, it has to
disclose this fact in its registration form and indicate whether it shall avail itself of such exemption or the
privilege under RA No. 9178. The choice made is binding on the BMBE for the entire period of validity of
its registration with the BIR, which is usually one year.

Every BMBE entitled to full income tax exemption is required to file an Annual Information Return,
together with an Account Information Form, or its equivalent, containing data from audited financial
statements and a sworn statement of assets owned and/or used in business. The Return shall be filed
with the RDO or the duly authorized Treasurer of the city or municipality in which the BMBE has its
principal place of business on or before the 15th day of the fourth month following the close of the taxable
year.

It should be noted that the income tax exemption privilege of a BMBE can be revoked under any of the
following circumstances:

(a) When the BMBE transfers its place of business to another locality;

(b) When the value of its total assets exceeds P3,000,000;

(c) When the BMBE voluntarily surrenders its Certificate of Authority to the Office of the City or Municipal
Treasurer;

(d) In case of death of the registered individual owner of the BMBE, if it is a sole proprietorship;

(e) In case of violation or non-compliance with the provisions of RA No. 9178, the Implementing Rules
and DOF Department Order No. 17-04;

(f) In case of merger or consolidation with an entity which is not eligible to be a BMBE;

(g) In case of sale or transfer of the BMBE, if it is a sole proprietorship, without prejudice to the transferee
applying for registration should it be qualified under the terms of DOF Department Order No. 17-04;
(h) Submission of fake or false or falsified documents;

(i) In case of retirement from business, or cessation/suspension of operations for one year; and

(j) Making false or omitting required declarations or statements.

If any of the above circumstances is found to exist, the BIR will notify the BMBE in writing of its findings
and require the BMBE to pay the corresponding income tax. This is, however, without prejudice to the
filing of the appropriate administrative or criminal complaints, if warranted.

Aside from exempting the BMBE’s income from tax, RA No. 9178 also encourages the local
government units to either reduce the amount of local taxes, fees and charges imposed or to exempt the
BMBEs from local taxes, fees and charges. Moreover, the BMBEs are exempt from the coverage of the
Minimum Wage Law. However, its employees shall be entitled to the same benefits given to any regular
employee such as social security and healthcare benefits.

Likewise, the interests, commissions and discounts derived from the loans granted by the Land Bank of
the Philippines, the Development Bank of the Philippines, the People’s Credit and Finance Corp.,
and the Small Business Guarantee and Finance Corp. to duly-registered BMBEs, as well as loans
extended by the Government Service Insurance System and Social Security System to their respective
member-employees for the purpose of establishing BMBEs, shall be exempt from GRT. To avail of the
exemption, a certified copy of the BMBE’s registration with the BIR should be submitted to the
lending institution concerned.

The incentives herein mentioned are only a few of those granted under RA No. 9178. While operating a
BMBE is not expected to turn one into a business tycoon, the benefits that the law grants guarantees the
micro businessman a better opportunity to compete in a more diverse and free market.

There are only two things assured in this world: death and taxes. When you have
a business, you also become the government’s unwilling tax collector. There are several
tax laws that you need to familiarize yourself with and the best thing to do is to consult
a practicing CPA or a tax lawyer. For the uninitiated or someone who never had a
legitimate tax-paying business before, business-related taxes may prove to be
confusing in the beginning.
Sooner or later, I’ll transition from employee to entrepreneur by establishing my own
business depending on the opportunity. As I familiarize myself on start-ups, I
researched some of the basic taxes that I need to know to prepare myself as I venture
into entrepreneurship.
TYPES OF BUSINESS TAXES
Value-Added Tax (VAT) – A 12% VAT must be collected for almost all kinds of product
sales, services, and leases. VAT taxes are remitted to Bureau of Internal Revenue (BIR)
on a quarterly or monthly basis and should be reflected in sales invoice and receipts.
For more information, you can visit BIR.
Salary and Wage Taxes – As a business owner responsible to the welfare of your
employees, you must withhold and remit to the proper government agencies employee
income withholding taxes, SSS premiums, Pag-Ibig, and Medicare. Inquire about proper
forms to fill out and how often to remit such withholdings. For SSS and benefits
premiums, remember that besides the employee’s contribution, you must also
contribute and remit an employer’s portion to the SSS and other benefits premiums.
Amusement Taxes – Cockpits, movie houses, cabarets, night and day clubs, boxing
tournaments, basketball games, horse racing, carnivals, and other amusement
businesses are subject to amusement taxes by the local and national government. Even
concerts of singers and actors are also subject to such taxes. If you have a business
that involves any of the activities mentioned above, make sure you incorporate the
particular tax rates for each operation in your admission prices.
Excise Taxes – If you have a business that involves the manufacture of alcohol, tobacco,
and petroleum products; importing of automobile or jewelry, and mining, you need to
pay special excise taxes. Find out if the business you are engaged in is taxed based on
your product’s weight and volume or taxed based on your selling prices.
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Import Taxes – When your business involves importation of goods as part of your raw
material, you have to pay customs duties. Importation of certain industrial machinery
and equipment also entails payment of import duties.
Individual Income Taxes – Your income from a sole proprietorship business is considered
personal income and must be included in your Individual Tax Return (ITR). Such
business income is taxable at the same rates as personal income from all other sources.
Your share in a partnership business is also taxable as your personal income whether the
partnership distributes your share of the income or not.
Corporate Income Taxes – If your business is structured as a corporation, the corporation
pays its own income taxes as if it is a separate tax-paying entity. As one of the stock
owners, you pay additional taxes on dividends if they are declared and distributed to
you. Such dividends are included in your personal income when you file for ITR.
Real Estate Taxes – If your business owns real estate or land, you must pay for real estate
taxes on a quarterly basis. There are penalties involved in late payments.
Estate or Inheritance Taxes – When you passed away, your heirs pay inheritance taxes on
money and property that you are leaving to them. You are reminded that if your
property is substantial enough, your heirs will be better off if you leave extra money for
such taxes, such as proceeds from a life insurance policy.
There maybe more taxes involved in operating a business. I’m sure I’ll be paying at
least three taxes in the list above depending on the business that I’ll incorporate in the
future. It’s best to consult a CPA or a practicing tax lawyer to know more about the
proper business taxes here in the Philippines.

How to Compute Income Tax in the

Philippines (Single Proprietorship)
FEBRUARY 7, 2011 BY VICTORINO ABRUGAR

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How to compute annual income tax in the Philippines for self-employed

individuals, such as proprietors and professionals? Computing income tax
expense and payable is different for individuals and corporations. Taxable
corporations may be taxed using a fixed income tax rate. On the other hand, if
you are a self-employed professional or an owner of a single proprietorship
business, your income tax expense is computed using a graduated tax rate. It
is a progressive tax which the tax rate increases as the taxable base amount
increases. This means that the higher taxable income you have, the higher
your income tax expense is. The following are the requirements, instructions
and procedures to compute and file your income tax return.
The tax form you will use
For self-employed individuals such as proprietors, professionals and those
with both business and compensation income, you will use BIR Form
1701 (please click here to download form). It must be prepared in 3 copies
(one for BIR, one for the Authorized Agent Bank and one for your copy).

Documentary requirements
Below are the documentary requirements that should be attached with the
return, if applicable. For taxpayers earning both business income and
compensation income, BIR Form 2316 should be attached.

1. Certificate of Income Tax Withheld on Compensation (BIR Form 2316), if

applicable
2. Certificate of Income Payments not Subjected to Withholding Tax (BIR
Form 2304) if applicable
3. Certificate of Creditable Tax Withheld at Source (BIR Form 2307), if
applicable
4. Waiver of the Husband’s right to claim additional exemption, if applicable
5. Duly approved Tax Debit Memo, if applicable
6. Proof of Foreign Tax Credits, if applicable
7. Income Tax Return previously filed and proof of payment, if filing an
amended return for the same year
8. Account Information Form (AIF) or the Certificate of the independent CPA
with Audited Financial Statements if the gross quarterly sales, earnings,
receipts or output exceed P 150,000.00
9. Proof of prior year’s excess tax credits, if applicable

Computation of Income Tax Due and

Payable
The following are simple steps to calculate your income tax payable.

1. Compute your taxable Compensation Income (positive) or excess of

Deductions over Taxable Compensation Income (negative). Here is how
you will compute it.

a. Determine your Gross Taxable Compensation Income. This is the income

you earn from your employer during the taxable year. If you are earning purely
from your business or you are not employed, then you can leave it blank.
b. Determine your premium paid on Health and or Hospitalization, which
should not exceed Php 2,400 per year. If none, then leave it blank. *
c. Determine your Personal and Additional Exemptions as follows:

Personal Exemptions:

For single individual or married individual judicially decreed as legally

separated with no qualified dependents………………………………………P
50,000.00
For head of family……………………………P 50,000.00
For each married individual *…………P 50,000.00

Note: In case of married individuals where only one of the spouses is

deriving gross income, only such spouse will be allowed to claim the
personal exemption.

Additional Exemptions:

* For each qualified dependent, a P25,000 additional exemption can be

claimed but only up to 4 qualified dependents

The additional exemption can be claimed by the following:

* The husband who is deemed the head of the family unless he explicitly
waives his right in favor of his wife
* The spouse who has custody of the child or children in case of legally
separated spouses. Provided, that the total amount of additional
exemptions that may be claimed by both shall not exceed the maximum
additional exemptions allowed by the Tax Code.
* The individuals considered as Head of the Family supporting a
qualified dependent

d. Add the amounts in (b) and (c), then deduct the total from the amount
in (a) to arrive at your taxable Compensation Income (positive) or excess
of Deductions over Taxable Compensation Income (negative).

2. Compute your gross taxable business or professional income. Here is

how you will calculate it.

a. Determine your sales, receipts or revenues for the taxable year.

b. Determine your cost of sales or cost of services.
c. (a) minus (b) will simply give you your gross taxable or professional income.

3. Compute your total taxable business or professional income by simply

adding result in (2) and your other taxable income.

4. Compute your Net Income. Your Net Income is equal to result in (3)
minus your allowable deductions. Your allowable deductions can be either:

a) Optional Standard Deduction – an amount not exceeding 40% of the net

sales for individuals and gross income for corporations; or

b) Itemized Deductions which include the following:

 Expenses
 Interest
 Taxes
 Losses
 Bad Debts
 Depreciation
 Depletion of Oil and Gas Wells and Mines
 Charitable Contributions and Other Contributions
 Research and Development
 Pension Trusts

Note: A taxpayer engaged in business or in the practice of profession

shall choose either the optional or itemized deduction (described
below). He shall indicate his choice by marking with “X” the appropriate
box, otherwise, he shall be deemed to have chosen itemized deduction.
The choice made in the return is irrevocable for the taxable year
covered.

Reminder: There are expenses that have ceilings or limits as deductibles to

your taxable income, such as interest expense, representation and
entertainment expense, etc. To learn more, please read our article “Deductible
Expenses (Allowable Deductions) in the Philippines”.

5. Compute you total taxable income by adding the result in #4 (Net

Income) to the result in #1 (taxable Compensation Income or excess of
Deductions over Taxable Compensation Income). If the result is negative or it
becomes a loss, then you will not have a tax due for the taxable year,
otherwise, continue to the next step.

6. Compute your Income Tax Due. This is also your income tax expense
incurred during the taxable year. Calculate your tax due for the taxable year
using the following tax rate table.
Note: When the tax due exceeds P2,000.00, the taxpayer may elect to pay in
two equal installments, the first installment to be paid at the time the return is
filed and the second installment 15 of the same year at on or before July the
Authorized Agent Bank (AAB) within the jurisdiction of the Revenue District
Office (RDO) where the taxpayer is registered.

7. Compute your Income Tax Payable. This is the tax you are still liable at
the end of the year. To calculate your income tax payable, deduct your
income tax due with the following tax credit/payments, if available.

-Prior Years’ Excess Credits

-Tax Payments for the First Three Quarters
-Creditable Tax Withheld for the First Three Quarters
-Creditable Tax Withheld Per BIR Form No. 2307 for the 4th Qtr.
-Tax Withheld Per BIR Form No. 2316
-Foreign Tax Credits
-Tax Paid in Return Previously Filed, if you have already file and this is your
Amended Return
-Other Payments made

8. Compute your Total Payable. If unfortunately, you fail to pay your income
tax on or before the due date, the following penalties will be imposed and will
be added to your total amount payable.

1. A surcharge of twenty five percent (25%) for each of the following

violations:
a) Failure to file any return and pay the amount of tax or installment due on or
before the due dates;
b) Filing a return with a person or office other than those with whom it is
required to be filed;
c) Failure to pay the full or part of the amount of tax shown on the return, or
the full amount of tax due for which no return is required to be filed, on or
before the due date;
d) Failure to pay the deficiency tax within the time prescribed for its payment
in the notice of Assessment (Delinquency Surcharge).

2. A surcharge of fifty percent (50%) of the tax or of the deficiency tax, in case
any payment has been made on the basis of such return before the discovery
of the falsity or fraud, for each of the following violations:
a) Willful neglect to file the return within the period prescribed by the Code or
by rules and regulations; or
b) In case a false or fraudulent return is willfully made.

3. Interest at the rate of twenty percent (20%) per annum, or such higher rate
as may be prescribed by rules and regulations, on any unpaid amount of tax,
from the date prescribed for the payment.

A simple illustration of computing total income tax payable is shown

below:

Gross Income (Gross business income, compensation income and other

income)
Less: Allowable Deductions (Itemized or Optional) (refer to # 4)
Equals: Net Income
Less: Personal & Additional Exemptions (see #1)
Equals: Net Taxable Income
Multiply by Tax Rate (5 to 32%) (refer to # 6)
Equals: Income Tax Due
Less: Tax credits & payments (refer to #7)
Equals: Income tax payable
Add: Penalties (Surcharge, interests & compromise) (refer to #8)
Equals: Total amount payable

Procedures for paying and filing

1. Fill-up BIR Form 1701 in triplicate copies.

2. If there is payment:
a. Proceed to the nearest Authorized Agent Bank (AAB) of the Revenue
District Office where you are registered and present the duly accomplished
BIR Form 1701, together with the required attachments and your payment.
b. In places where there are no AABs, proceed to the Revenue Collection
Officer or duly Authorized City or Municipal Treasurer located within the
Revenue District Office where you are registered and present the duly
accomplished BIR Form 1701, together with the required attachments and
your payment.
c. Receive your copy of the duly stamped and validated form from the teller of
the AABs/Revenue Collection Officer/duly Authorized City or Municipal
Treasurer

3. For “No Payment” including refundable/ creditable returns, returns with

excess tax credit carry over, and returns qualified for second installment:
a. Proceed to the Revenue District Office where you are registered or to any
established Tax Filing Centers established by the BIR and present the duly
accomplished BIR Form 1701, together with the required attachments.
b. Receive your copy of the duly stamped and validated form from the
RDO/Tax Filing Center representative.

Deadline
Final Adjustment Return or Annual Income Tax Return – On or before the
15th day of April of each year covering income for the preceding year

For more information, such as who are the individuals exempt from income
tax and other tax related information, please visit this web page (Tax
Info) from the Bureau of Internal Revenue (BIR). Updates to this article will be
provided when necessary.

Update 1 (April 28, 2011)

For professionals and freelancers, such as online entrepreneurs, bloggers,
web designers, mixed income earners, etc., who keep on asking how to
register with the BIR and pay their income taxes, we have published an article
titled “How to Register with the BIR (for Professionals)” for your guide.

Update: The BIR issued Revenue Regulation No. 19-2011 on November

2011 requiring self-employed individual taxpayers to use the revised BIR
Form 1701 for the income tax return covering and starting December 31, 2011
for filing on or before April 15, 2012. For more information about the
instructions and guidelines on filing the said return, please refer to the last
page of the new form provided in the link above (in the tax form you will use
section).