In order to create a simpler, more just and effective system of tax collection for individuals, the government passed the Tax Reform for Acceleration and Inclusion (TRAIN) Law, or Republic Act No. 10963, which took effect on January 1 this year. As the first quarter of the current year draws to a close, the changes to individual income tax provision below, as implemented by the Revenue Regulation No. (RR) 8-2018, must be embraced:
Individual earning purely compensation income
As described by RR 8-2018, the taxable income for an individual earning through compensation is gross compensation income less nontaxable income/benefits, such as, but not limited to, the 13th-month pay and other benefits, de minimis benefits and employee’s share in the SSS, GSIS, PHIC, Pag-ibig contributions and union dues. Note that the allowable deductions pertaining to the personal and additional exemptions are now removed and the total tax-exempt for 13th-month pay and other benefits has been increased from P82,000 to P90,000.
The exemption of minimum wage earners (MWEs) from income tax based on their statutory minimum wage rates is retained. Further, the holiday, overtime, night shift differential and hazard pays received by MWEs are likewise exempt.
Individual purely from self-employment or practice of profession
Individuals earning through self-employment or practice of a profession alone shall be subject to the following:
If the gross sales/receipts and other non-operating income do not exceed the value-added tax (VAT) threshold of P3 million, the individual has the option to be taxed at:
Graduated income tax rates prescribed under Section 24(A)(2)(a) of the Tax Code, as amended; or
8 percent income tax rate on gross sales or receipts and other non-operating income in excess of P250,000
If the gross sales/receipts and other non-operating income exceed the VAT threshold, the individual shall be subject to the graduated income tax rates.
It is worth mentioning that the taxpayer should signify his/her intention to elect the 8 percent tax in the initial quarter return of the taxable year of the business. Otherwise, the taxpayer shall be considered as having availed of the graduated rates. Note that the election shall be irrevocable and no amendment of option shall be made for the said taxable year.
Further, if the taxpayer opted to subject himself to 8 percent tax in the first quarter and subsequently exceeded the VAT threshold, he will automatically be taxed at the graduated rate and the tax paid in the previous quarter can be used as tax credits.
Individuals earning income from both compensation and self-employment shall be taxed the same way as discussed above. However, for the self-employment income, if the individual opts for the graduated tax rates, the individual shall combine the taxable income from both sources in computing the total taxable income and, consequently, the income tax due.
On the other hand, if the individual opts to be taxed for his income from self-employment under the 8 percent tax rate, a separate computation from both sources shall be made and the P250,000 deduction will only be applied to compensation income.
Removal of preferential tax rate on income of Filipinos and alien employees
The BIR clarified that all employees of regional headquarters (RHQs) and regional operating headquarters (ROHQs) of multinational companies, offshore banking units (OBUs) and petroleum service contractors and subcontractors enjoying preferential tax rate are now subject to the regular individual income tax rates. Hence, they will be subject to withholding tax on compensation based on the revised withholding tax table of Revenue Memorandum Circular No. (RMC) 105-2017, as implemented by RMC 01-2018.
Tax filing requirement
For taxpayers being taxed at 8 percent income tax,the Financial Statements (FS) are not required as attachment in filing the income tax return. However, existing rules and regulations on bookkeeping and invoicing receipting shall still apply.
For an individual who chooses the graduated income tax rate, an FS is required as attachment to the annual income tax return even if the gross sales/receipts and other non-operating income amount to less than the VAT threshold. However, the income tax return of a taxpayer whose gross income exceeds the said VAT threshold shall be accompanied by an audited FS.
For married individuals, both taxpayers shall compute their individual income tax separately based on their respective taxable income. If any income cannot be definitely attributed to, or identified as income exclusively earned or realized by, either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income.
On the other hand, the following individuals are not required to file income tax return:
An individual earning purely compensation income whose taxable income does not exceed P250,000
An individual whose income tax has been correctly withheld by his employer, provided that such individual has only one employer for the taxable year
An individual whose sole income has been subjected to final withholding tax
An MWE as defined in these regulations
In all cases, all individuals deriving compensation income, regardless of the amount, from two or more concurrent or successive employers at any time during the taxable year are not qualified for substituted filing.
Embracing change isn’t always easy. It may involve a lot of adjustments and some measure of discomfort. These new governing tax policies may be difficult for some, but if these can pave the way to a better future for all Filipinos, then we have to bear with these changes. We have to comply with these new requirements to avoid penalties that the BIR may impose.
The author is a senior with the Tax & Corporate Services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd. – a member firm of Deloitte Touche Tohmatsu Limited – comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.