Tips for Small Business Tax Deductions in the Philippines

March 04, 2016 | Trinh Danh

If you are an SME (Small to Medium Enterprise) in the Philippines, and you want to avail of tax deductions, you need first to know the following before you file and pay your income tax before the due date of April 16. When computing your income tax, you should determine the deductible expenses and costs to arrive at your net taxable income so as to maximize your profits and reduce your overhead.

Allowable Tax Deductions in the Philippines

The Philippines offer allowable tax benefits or deductions for certain expenses. This conforms to the country's PAS (Philippine Accounting Standards) and the NIRC (National Internal Revenue Code). In Philippine financial accounting, expenses are recognized as they are accrued. Meanwhile, taxation is recognized when it's paid for. Here are other details:

  • A Close Look at Allowable Deductions: Taxpayers (individual professionals or whole businesses) can pick between itemized and optional deductions. For OSD (Optional Standard Deduction), trimming an amount not exceeding 40 percent of gross receipts or sales is allowable.

However, with itemized deduction, all necessary and ordinary expenses incurred or paid throughout the taxable year are deducted from the gross income. This includes expenses stated in the Tax Code such as insurance expenses, rentals, employers' share (for HDMF, Medicare, SS, and other contributions), and employee benefits (wages and salary). 

  • Income Tax Rates: Income tax rates for SMEs and individuals range from 5 percent to 32 percent. They depend mostly on your net taxable income. The more income you have, the bigger the taxation is. Your income tax table is found in the back of your ITR (Income Tax Return).
  • Family, Living, or Personal Expenses: Expenses can only be claimed if they are incurred or paid as part of a business operation as well as a profession or trade of a given taxpayer. Therefore, these expenses are not considered tax deductible in the least.
  • Deduction Substantiation and Kickbacks: You need to substantiate your expenses with sufficient evidence, such as official receipts and similar records, for it to be considered tax deductible. You mainly need info on the conduct, operation, management, and development of the profession, business, or trade of the taxpayer.What's more, kickbacks, bribes, and expenses done illegally are not allowed as taxable income deductions. 
  • Expanded Withholding Tax: The EWT (Expanded Withholding Tax) serves as the income recipient's advance payment for his income tax. It is only a partial and not the full income tax payment that can be credited against the due income tax as a tax deduction of sorts.
  • Tax Arbitrage or Interest Expense: There are limitations and exceptions on the amount of interest expense you can deduct from the income. The allowable interest expense deduction of the taxpayer can be decreased by an amount equal to the 33 percent of interest income to be subjected to tax.
  • Bad Debt Expense: This is only deductible when it is considered worthless and charged off within the taxable year. Bad debt recovery previously allowed as a deduction in years prior shall be included as part of the gross income of the recovery year to the extent of the income tax benefit of the deduction.

That is the nitty-gritty when it comes to small business tax deductions in the Philippines. At any rate, Servcorp is a Philippine SME supporter through and through. Servcorp provides virtual office and serviced office offerings to help SME reduce overhead expenses significantly. Please call +63 2 755 6500 for more information.