2025 Tax and Compliance Updates in the Philippines: What Every Business Needs to Know

As the Philippines evolves its tax and payroll compliance framework in 2025, businesses, especially foreign companies looking to hire locally, must adjust to new regulations. These updates impact payroll processing, income tax withholding, social contributions, and VAT, all of which are critical for maintaining smooth hiring and operational practices.

Below is a concise overview of the key changes and practical recommendations to help your business remain compliant.

1. Updated Income Tax (PAYE) System

Under the TRAIN law, the Philippines now features a more favorable and progressive tax system:

• Tax-Exempt Threshold: Annual income up to ₱250,000 remains tax-free, benefiting low-income earners.
• Graduated Brackets: Income above ₱250,000 is taxed progressively, with rates increasing up to 35% for earnings over ₱8 million.
• Withholding Requirements: Employers must withhold taxes using updated BIR tables and remit these PAYE deductions monthly to the Bureau of Internal Revenue (BIR).

For businesses that hire in the Philippines, updating payroll systems to reflect these new brackets is essential to avoid compliance issues.

2. Increased Social Contributions

In 2025, statutory contributions have risen, impacting overall payroll costs:

• SSS Contributions: The rate increased from 14% to 15% of the employee’s salary. Employers contribute 10%, while employees contribute 5%.
• PhilHealth Premiums: The premium rate has been adjusted to 5% (from 4%), with a salary ceiling of ₱100,000 per month.
• Pag-IBIG Fund: The maximum salary base for contributions doubled from ₱5,000 to ₱10,000, with both employer and employee contributions set at 2%.

These changes emphasize the importance of recalibrating your payroll processes to ensure accurate deductions and timely remittance.

3. VAT and Digital Services Tax Expansion

While the standard VAT rate remains at 12%, new measures target the digital economy:

• VAT on Digital Services: A law (RA 12023) now imposes 12% VAT on digital services provided by non-resident companies to Philippine consumers. This affects foreign businesses in digital sectors like streaming, online subscriptions, and cloud services.
• E-Invoicing & Filing: Enhanced digital reporting systems under the Ease of Paying Taxes Act (EOPT) now require businesses to file electronically, simplifying compliance but necessitating updates to your accounting processes.

Businesses expanding in the Philippines must integrate these requirements to ensure that VAT calculations and remittances are handled accurately.

4. Corporate Tax and Incentives

Recent adjustments in corporate taxation aim to spur investment:

• Standard Corporate Tax: The general corporate income tax rate is 25% for most companies.
• Preferential Rates for MSMEs: Eligible micro, small, and medium enterprises benefit from a reduced rate of 20% if they meet certain income and asset criteria.
• CREATE MORE Incentives: The government has extended tax holidays and provided extra deductions for strategic investments, benefiting foreign companies that set up qualifying projects.

Adopting these incentives can lower operational costs, but businesses must ensure proper segregation of income streams and compliance with additional reporting requirements.

5. Withholding Tax on Salaries and Benefits

Employers are responsible for withholding taxes on employee salaries, bonuses, and benefits:

• 13th-Month Pay and Bonuses: Tax-exempt up to ₱90,000 per year; amounts exceeding this cap are subject to withholding.
• Fringe Benefits Tax (FBT): A flat rate of 35% is applied to certain non-cash benefits for managerial staff.
• Regular Reporting: Monthly PAYE returns and annual reconciliation forms (e.g., BIR Form 2316) must be filed accurately.

Ensuring these deductions are correctly applied is vital for avoiding penalties and maintaining trust with employees.

6. New Regulations Affecting Foreign Companies

Foreign companies expanding into the Philippines face a more streamlined but demanding regulatory environment:

• Ease of Paying Taxes Act (EOPT): Simplifies tax filings by allowing electronic submissions and payments, reducing bureaucratic delays.
• Labor and Immigration Compliance: New rules facilitate the processing of Alien Employment Permits (AEPs), but require businesses to demonstrate efforts to hire locally.
• Digitalization Push: Businesses must adopt modern systems (e.g., e-invoicing, online payroll) to stay compliant in a rapidly digitizing tax environment.

Foreign businesses must update their HR and accounting practices to leverage these digital tools effectively.

Practical Recommendations

To adapt to the 2025 updates, consider these steps:

1. Update Payroll Systems: Ensure your software reflects the new tax tables, social contribution rates, and minimum wage changes.
2. Train HR and Finance Teams: Regular workshops on new regulations and filing procedures can prevent costly errors.
3. Engage Local Experts: Collaborate with local accountants, tax advisors, or an Employer of Record like Cadana to handle registrations, filings, and compliance.
4. Leverage Digital Tools: Utilize e-filing platforms provided by the BIR to streamline VAT and tax submissions.
5. Regular Compliance Audits: Schedule periodic internal reviews to ensure your payroll and tax processes remain aligned with the latest laws.

Summary

The 2025 tax and compliance updates in the Philippines bring significant changes that affect how businesses manage payroll, hire employees, and remain compliant. For both local and foreign companies, these updates offer opportunities for increased financial efficiency—but only if businesses adapt their systems and processes accordingly.

By investing in modern payroll solutions, training your teams, and partnering with local experts or an Employer of Record like Cadana, you can navigate the evolving regulatory landscape smoothly. This proactive approach not only minimizes the risk of non-compliance but also positions your business for sustainable growth in the Philippine market.

Ready to adapt to the new regulatory environment? Partner with Cadana today and ensure your business stays ahead of the curve while capitalizing on the opportunities in the Philippines.