Philippines payroll and tax overview.

The Philippines is an archipelago in the West Pacific Ocean and one of the most populous countries in Southeast Asia. Emerging from a colonial past, the Philippines became a stable democracy in the 20th century, transitioning from a primarily agricultural economy to one based on services and manufacturing. Following further significant reforms, the Philippine economy has grown to become the 33rd-largest in the world: in 2019 it reached an estimated GDP of $357 billion with a growth rate of 6%. Thanks to the Philippines’ resilience to global economic turbulence, that positive trend is predicted to continue, with Goldman Sachs suggesting that it could become one of the world’s 20 largest economies - and the largest in Southeast Asia - by 2050. While agriculture remains an important commercial sector in the Philippines, information technology, energy, and transport infrastructure have grown in economic significance. Today, the Philippines enjoys a buoyant internal consumer market, a stable banking system, and trade connections to the rest of Asia: the Asian Development Bank, for example, is headquartered in Manila and offers businesses a range of initiatives and opportunities around the region. The Philippines is a member of the UN, the WTO, ASEAN, and APEC and was ranked 95 on the World Bank’s Ease of Doing Business Survey 2019.

Why Invest in the Philippines?

Interested investors will find a range of reasons to target the Philippines, including:

• Growth sectors: Over the past 60 years, the Philippines has experienced exciting growth in a range of sectors, including manufacturing, construction, mining and renewable energy. The country has also developed a regional reputation as a hub for technology production.
• Economic resilience: The Philippines’ economy has weathered tough economic times relatively well. After emerging from the global financial crisis, both the OECD and the National Competitiveness Council ranked the Philippines’ corporate governance practices as some of the best in Asia.
• Geographic location: The Philippines enjoys a strategic location at the heart of one of the world’s fastest-growing economic regions. A gateway to a regional market of over 500 million people, the Philippines also represents an ocean and air freight ‘crossroads of trade and investment interests.
• Government reforms: The government has adapted the Philippine economy to foreign investment, establishing special economic zones and allowing increased private-sector participation in infrastructure development. A variety of sectors have been deregulated to stimulate investment.
• Skilled workforce: The Philippines’ workforce is one of the most skilled in Asia with high rates of literacy and education, and English language proficiency. In 2000, the Meta Group ranked the country as one of world’s best knowledge bases.

Foreign Direct Investment in the Philippines

The government provides various incentives to encourage inward investment in the Philippines, ranging from lower-cost business areas, to reduced taxation strategies.

Company Registrations and Establishing an Entity in the Philippines

All entities have to be legally established in the Philippines to be able to process payroll.

Any company wanting to employ staff in the Philippines must meet the following basic requirements to set up a business:

• Obtain bank certificate of deposit of the paid-in capital
• Register with the Securities and Exchange Commission (SEC)
• Obtain Community Tax Certificate (CTC), Barangay (district) clearance and mayor’s permit/municipal license
• Register for taxes at the Bureau of Internal Revenue (BIR)
• Obtain special books of account (one set of four books: the cash receipts account, the disbursements account, the ledger, and the general journal) for presentation
• Pay documentary stamp taxes
• Obtain the authority to print receipt/invoices from the Bureau of Internal Revenue (BIR)
• Register with the Social Security System (SSS), Home Development Mutual Fund (HDMF) or Pag-ibig Fund and Philippines Health Insurance Corporation (PHIC)

Business Banking in the Philippines

It is mandatory to make payments to both employees and the authorities from an in-country bank account if the client is making the payments themselves. However, if the payroll is outsourced and all cash transactions are dealt with from overseas, a Philippine bank account is not required for payroll purposes as the payroll provider can make payments on the employers’ behalf using their own bank account.

Generally, banks are open to the public from 9:00AM to 4:00PM and closed on Saturdays.

What Are the Working Days and Working Hours in Philippines?

The working week is Monday to Friday. The working day for commercial offices is usually eight hours, exclusive of mealtimes. Some services require that some employees work for 6 days or 48 hours.

Basic Facts About the Philippines

General Information

The Republic of the Philippines is actually made up of over 7,107 islands and shares maritime borders with neighbouring Taiwan and Vietnam to the north and west, and Palau, Malaysia, and Indonesia to the east and south. Now a highly ethnically-diverse country, the Philippines was colonised by Europeans in the early 16th century when Magellan’s expedition arrived on the islands and established outpost settlements. While the Philippines’ sovereignty was contested frequently over the following centuries, in 1946 it became an independent nation and began a series of political and economic reforms which would see it emerge as a significant regional and global presence in the 21st century. The Philippines is an active volcanic archipelago and experiences a characteristically warm, wet tropical climate across its many mountainous and rainforest environments. Its flora and fauna are abundant and diverse, and with a range of stunning natural beauty spots, the Philippines attracts millions of tourists from across the world each year.

Full Name: Republic of the Philippines

Population: 108.1 million (UN, 2019)

Capital: Manila

Major Language: Filipino, English (both official)

Major Religion: Christianity

Main Exports: Electrical machinery, clothing, food, live animals, chemicals and timber products

GNI per Capita: US $3,830.00 (World Bank, 2018)

Internet Domain: .ph

International Dialing Code: +63

The tax year runs from 1 January to 31 December.

There are four statutory obligations that both employees and employers are obliged to adhere to under the Philippine Law.

The monthly Social Security, PhilHealth and Pag-IBIG Fund contributions from the employees’ salary, together with the employer’s share of contributions, has to be paid to the respective statutory agencies or any accredited banks (if applicable) on or before the payment date. The payment date will vary depending on the statutory agency.

Income Tax in the Philippines

Withholding Tax

Every employer is required to deduct and withhold taxes on employees’ compensation in accordance with Philippine Law. Consequently, personal income tax is collected from the employee through the payroll and the employer acts as the withholding agent.

For individual citizens and resident aliens earning purely compensation income and individuals engaged in business and Practice of Profession, the following graduated income tax rates under Section 24(A)(2) of the Tax Code of 1997, as amended by Republic Act No. 10963, or the Train Law effective January 1, 2018.

Payment of withholding taxes must be made on the following schedule:

Social Security in the Philippines

Social Security System (SSS)

SSS is a privatized social insurance program established to protect members and their families against the hazards of disability, sickness, maternity, old age, death and other contingencies resulting in loss of income or financial burden.

All private employees and employers are compulsorily covered under this program. The Social Security premium of both the employee and employer will vary depending on the employee’s monthly compensation bracket. Employers must deduct the Social Security contributions from the employees’ salary and remit these contributions, together with the employer’s share of contributions, to the SSS or any accredited banks.

An SSS employee-member should:

• Secure their SSS numbers;
• Ensure that they are reported for coverage under the SSS by their employers;
• Pay their monthly share of contributions and ensure that these contributions are remitted to the SSS by their employers;
• Submit to their employer SSS Salary Loan Voucher or Statement if any, to commence loan amortization deductions from their monthly payroll. Ensure that the employer has done the necessary ML2 posting

An employer is obliged to:

• Require to see the SSS number of a prospective employee;
• Report all employees for SSS coverage within thirty (30) days from the date of employment
• Deduct from the employees the monthly SSS contributions based on the schedule of contributions;
• Submit a summary of all employees’ contributions
• Ensure that Monthly SSS Electronic Collection Lists with Payment Reference Number (PRN) where employees’ names are included, are submitted to the SSS with payment.
• The employer shall be responsible for the collection and remittance to the SSS of the amortization due on the member-borrower’s salary loan through payroll deduction.

The new contribution schedule will be implemented for the applicable month of April and payable in May 2019, the table and payment schedule can be found here.

The typical penalties awarded for the late submission and payment of tax and social security contributions are as follows:

• Tax - 25% surcharge; 20% interest per annum and compromise penalties for failure to file the tax return and pay the amount of tax;
• SSS - charging monthly penalty of 3% for overdue contributions

Philippine Health Insurance Corporation (PHIC)

The Philippine Health Insurance Corporation, popularly known as PhilHealth, is a government-funded health care system in the Philippines. It was established to administer the National Health Insurance Program, which will prioritize the needs of the underprivileged, sick, elderly, disabled, women and children.

Both employers and employees are required to contribute to the PHIC equally based on the employees’ monthly salaries.

The employer deducts the amount of monthly premium corresponding to the employee’s share from the employee’s basic monthly salary (Please refer to the latest PhilHealth Premium Contribution Table here), and remit the employee’s premium contribution, together with the employers’ share to any of the Accredited Collecting Agents (ACA) nationwide on or before the due date.

Reporting Tax in the Philippines

Employers in the Philippines must report tax to the Philippines Bureau of Internal Revenue (BIR), but must first obtain a tax certificate from their local City Treasurer’s Office, and a permit from their Business Permits and Licensing Office. Annual tax returns are made via BIR Form 1700, and must be filed on or before 15 April of the year following the current tax year. Reporting forms required for monthly and annual tax and social security contributions are as follows:

SS Form R-5 & R-3: Contribution Payment Return Form and Contribution Collection List respectively. Used to report the total and per employee SSS contribution for the month.

PhilHealth Form ME-5: Contribution Payment Return used to remit the monthly premium contribution

PhilHealth Form ER2: Report of Employee-Members

PhilHealth Form RF-1: Employer’s Remittance Report

Pag-IBIG Form MCRF: Membership Contribution Remittance Form is used to report monthly

Pag-IBIG contribution BIR Form 1601-C: Monthly Remittance Return of Income Tax Withheld on Compensation

BIR Form 1604-CF: Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes

BIR Form 2305: Certificate of Update of Exemption and of Employer’s and Employees’ Information

BIR Form 1700 (Year End Non-Substituted Filing): Annual Income Tax Return

Alphalist Data File Reporting:

• Schedule 1 (REMITTANCE PER BIR FORM NO. 1601-C)
• Schedule 7.1 (ALPHALIST OF EMPLOYEES TERMINATED BEFORE DECEMBER 31)
• Schedule 7.2 ALPHALIST OF EMPLOYEES WHOSE COMPENSATION INCOME ARE EXEMPT FROM WITHHOLDING TAX BUT SUBJECT TO INCOME TAX
• Schedule 7.3 ALPHALIST OF EMPLOYEES AS OF DECEMBER 31 WITH NO PREVIOUS EMPLOYER WITHIN THE YEAR
• Schedule 7.4 ALPHALIST OF EMPLOYEES AS OF DECEMBER 31 WITH PREVIOUS EMPLOYER/S WITHIN THE YEAR
• Schedule 7.5 ALPHALIST OF MINIMUM WAGE EARNERS

BIR Form 2316: Employer’s Certificate of Compensation Payment / Tax Withheld - to be completed and issued to each employee, by each employer, showing the total amount paid and the taxes withheld during the calendar year.

Information required for completing the form:

• Registered Company Name
• Registered Company Address
• Names of the Employees
• Statutory Employee and Employer Account Numbers
• Monthly Employee and Employer share

Completed forms are to be sent to the respective statutory agencies such as the Social Security System, Philippine Health Insurance Corporation (PhilHealth), Home Development Mutual Fund (Pag-IBIG) and Bureau of Internal Revenue (BIR). The payroll vendor can transact with the statutory agencies as the company’s authorized representative. It is not necessary in the Philippines for the employer to sign the form, as the payroll vendor can sign most documents on their client's behalf provided there is a clear authorization from the client and upon presentation of a documented Secretary's Certificate or Board Resulotion.

New Employees in the Philippines

The deadline for a new employee to be registered with the authorities is their start date as an employee.

Upon employment, new hires are required to submit the following:

• Social Security No.
• PhilHealth No.
• HDMF No. (Valid HDMF IDs to start with Digit 1)
• Taxpayer Identification No. (TIN)

To secure these numbers, new employees need to register with SSS, PhilHealth and HDMF prior to their employment. This is to ensure that the employer can process the respective statutory contribution of the employees.

Registration with the Bureau of Internal Revenue (BIR) to secure TIN will follow a different process. The employee has to fill out the Application for Registration (BIR Form 1902) and attach a copy of the birth certificate. The employer will submit the form to the Revenue District Office (RDO) where the company is registered.

There’s no particular template mandated by Philippine Law for obtaining details to set up a new start. There is, however, basic information required:

• Name
• Gender
• Marital Status
• Date of Birth
• Nationality and Citizenship
• Address
• Social Security No.
• PhilHealth No.
• HDMF No. (Valid HDMF IDs to start with Digit 1)
• Taxpayer Identification No. (TIN)
• Tax Status (Marital Status and No. of Dependents)

Certificate of Compensation Payment and Taxes Withheld (BIR 2316) from the employee’s previous employer should also be submitted to the present employer within 30 days of employment. The tax authority to consolidate the employee’s previous and present income and issue a consolidated Certificate of Compensation Payment and Taxes Withheld (BIR Form 2316) no later than January 31 of the following year mandates the present employer.

Leavers in the Philippines

Final payment will be given to the leaving employee 10 days after completion of exit clearance requirements.

The responsibility lies with the employer to notify SSS, PHIC and HDMF of an employee’s resignation within 30 calendar days from the date of separation.

Employers in the Philippines must observe a range of payroll compliance regulations, which include monthly withholding obligations. The three main statutory contributions deducted from employee salaries each month are:

• Social Security: General social insurance covering sickness, disability, maternity and old age.
• PhilHealth: The Philippine Health Insurance Corporation scheme aims to provide access to quality medical and health care services for all employees.
• Home Development Mutual Fund: A housing program designed to provide short term loans and access to housing programmes for all workers in the Philippines.

Mandatory contributions to Philippine social security schemes must be withheld and paid monthly to the Bureau of Internal Revenue 10 to 15 days after the end of the tax month. Employees must be provided with a payslip, although this may be issued online. Payroll records must be kept for at least 10 years. Foreign businesses should develop a payroll solution which takes into account the pay needs of employees in the Philippines and in other territories. Given the complexity of the Philippine’s payroll regulations, it may be worth engaging a payroll provider to implement a global payroll solution in order to deliver procedural efficiency, and compliance expertise, quickly.