During lectures involving business formation and/or taxation, we are inevitably asked, “How do I determine the best structure for my business?”
There is a myriad of criteria to consider, but in this article, we’d like to focus on the criterion of annual income tax. It will also serve as our follow-through on our previous article that had explored which of the graduated income tax[1] and the 8% tax on gross sales/receipts[2] is the more tax-efficient option for individuals.
In that article, we concluded that the 8% tax is the more tax-efficient option when gross sales/receipts fall between PHP 821,429 and 3 million per year, and if we now add the regular income tax for corporations into the mix, the 8% tax rate will still yield the lowest income tax out of all three.
Beyond the PHP 3 million threshold, however, individuals have no choice but to revert to the graduated tax rates, which could go as high as 35% on net taxable income in excess of PHP 8 million. At this point, it would make the most sense to take advantage of the regular corporate income tax rate, which, as had been provided by the CREATE Law (R.A. 11534), is 25% of net taxable income of corporations in general and 20% of net taxable income that does not exceed PHP 5 million for corporations whose assets (excluding land) do not exceed PHP 100 million.[3] Comparing just the graduated tax rates on individuals (without giving too much consideration to the 8% rate, given its capped application) with the regular income tax rates on corporations, the latter is a much more tax-efficient option when gross sales/receipts begin to exceed PHP 1,625,000.[4]
In sum, all other things being equal:
| Gross sales and/or receipts | Most tax-efficient option | Income tax on |
| PHP 0 – 250,000 | 8% on gross sales and/or receipts | Individual |
| PHP 250,001 – 821,429 | Graduated rates at OSD + percentage tax | Individual |
| PHP 821,429 – 3 million | 8% on gross sales and/or receipts | Individual |
| Above PHP 3 million | Regular corporate income tax at OSD | Corporation |
16 September 2024
[1] National Internal Revenue Code Sec. 24(A)(2)(a) as amended by RA 10963
[2] National Internal Revenue Code Sec. 24(A)(2)(b), added by RA 10963
[3] National Internal Revenue Code Sec. 27(A) as amended by RA 11534
[4] Excluding the one-time incorporation costs of filing fees (0.2% of authorized capital) and documentary stamp taxes (0.5% of paid-up capital)