Audit and Compliance in the Philippines: A Guide for Foreign Investors

Under the Tax Code, all persons, natural or juridical, subject to internal revenue taxes must keep proper records of all business transactions and keep books of their accounts.

Companies whose gross annual earnings exceed PHP3 million (US$51,464) must have their accounts audited. Companies whose annual sales do not exceed PHP3 million (US$51,464) can file their tax returns with unaudited financial statements.

Several government regulatory bodies have the power to establish additional reporting requirements. These regulatory bodies are:

• Securities and Exchange Commission (SEC);
• Insurance Commission (IC);
• The Bangko Sentral ng Pilipinas (BSP);
• Professional Regulation Commission (PRC); and
• Professional Regulatory Board of Accountancy (PRBOA).

Regulated entities, such as public utilities, insurance companies, and banks or corporations, are to submit their audited financial statements to their relevant government regulatory agency as well as file to the SEC. 

Further, the Securities Regulation Code (SRC) Rule 68 provides the reporting requirements for the following types of entities:

• Regional operating headquarters of foreign companies that have a total revenue of more than PHP1 million (US$17,155);
• Stock corporations with paid-up capital of more than PHP50,000 (US$857);
• Branch offices of foreign corporations with capital of more than PHP1 million (US$17,155); and
• Non-stock corporations with assets of more than PHP500,000 (US$8,577) and gross annual revenue of PHP100,000 (US$1,715).

Ease of Paying Taxes (EOPT) Act

The Ease of Paying Taxes Act, also known as Republic Act No. 11976, became effective on January 22, 2024. This law aims to modernize tax administration and streamline processes to encourage easier compliance for taxpayers. Notable changes include the new classification of taxpayers.

Taxpayers are now categorized based on gross sales:

• Micro: Less than PHP 3 million (US$51,464);
• Small: PHP 3 million to less than PHP 20 million (US$342,529);
• Medium: PHP 20 million to less than PHP 1 billion (US$17.1 million); and
• Large: PHP 1 billion and above.

Electronic filing requirements

The SEC now requires online submission of AFS through the Electronic Filing and Submission Tool (eFAST). Hard copies, emails, and courier submissions are no longer accepted, except under specific exemptions.

Annual report for foreign nationals

Registered foreign nationals must report in person to the Bureau of Immigration within the first 60 days of the calendar year unless exempted (e.g., minors, seniors, pregnant women). The process includes online registration and a virtual report via Google Meet.

Appointing auditors

All companies must submit their financial statements accompanied by an auditor’s report issued by an independent certified public accountant (CPA). The PRC is the government agency responsible for regulating the country’s accounting profession. The PRBOA is responsible for the licensure examination and for CPAs to observe the rules implemented in the Philippine Accountancy Law of 2004.

The auditor is appointed by the board of directors of the corporation and the Securities and Exchange Commission (SEC) requires external auditors to be rotated every five years.

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Once the services of the auditor have been used for these five consecutive years, the same auditor cannot participate in the auditing process for a period of, in most cases, two years.

Fiscal periods

The Philippines uses a self-assessment tax system, and the accounting period consists of 12 months, normally ending on December 31. Tax returns must be filed on the 15^th day of the fourth month following the closing of the taxable year. A company can change its accounting period with prior approval from the Bureau of Internal Revenue (CIR).

Accounting standards

The Philippine Financial Standards (PFRS) are the most authoritative accounting standards in the country. This applies to all entities with public accountability.

SRC Rule 68 sets out the applicable framework for the following type of entities:

• For large and publicly accountable entities – The PFRS;
• For SMEs – PFRS for SMEs; and
• Micro-enterprises – PFRS for SMEs or other accounting standards issued after 2004.

Large companies are classified by any of the following criteria:

• Companies with total assets of more than PHP350 million (US$6.2 million) or have total liabilities of more than PHP250 million (US$4.4 million);
• Companies in the process of filing financial statements in order to issue class instruments;
• Companies that are required to file financial statements; or
• Holders of secondary licenses from a regulatory agency.

A company is classified as an SME if it meets all of the following criteria:

• Have total assets of between PHP3 million (US$53,790) and PHP350 million (US$6.2 million) or total liabilities of between PHP3 million (US$53,790) and PHP250 million (US$4.4 million);
• Are not in the process of filing financial statements in order to issue class instruments; and
• Do not hold secondary licenses from regulatory agencies.

SMEs are obligated to follow the PFRS for SMEs unless they fall under one of the below categories:

• A subsidiary of a parent company that is reporting under the full PFRS;
• Is part of a group that is reporting under full PFRS;
• It is a branch office or regional operating headquarters of a foreign company, also reporting under full PFRS; or
• The company is a subsidiary of a foreign parent company that is planning to implement the IFRS system.

Annual reports

All companies regardless of their size are required to prepare their documents in Tagalog, in addition to Spanish and English.

Companies must maintain their books of account, which consist of a journal and a ledger (or their equivalents). These records need to be retained for three years although some local governments may require records to be kept for up to five years, and the Philippine Stock Exchange requires dealers in securities to retain their records for six years.

Accounting records must also be kept in Philippine Pesos, or a ‘functional currency’ used in its operations if approved by the SEC and the BIR.

Companies must maintain a stock and transfers book that must be registered with the SEC; as well as a book of accounts that must be registered with the BIR before use, which consists of the following:

• General ledger;
• General journal;
• Purchase journal;
• Sales journal; and
• Cash receipts/disbursements journal.

The BIR has the power to examine a company’s financial records for up to three years from the date of filing.

Penalties for non-compliance

There is a 25 percent surcharge of the amount of tax due if a company fails to timely file any return plus a 12 percent interest per annum. A 50 percent surcharge of the basic tax due is applied to companies who willfully neglect to file their return or purposefully submit fraudulent returns.

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