The Tax Reform for Acceleration and Inclusion (TRAIN) is the first package of the comprehensive tax reforms introduced by President Duterte’s administration in the Philippines. The biggest impact of TRAIN is that it seeks to lower personal income tax and thereby lead to higher take-home-pay for many taxpayers. In this article, UnionBank GlobalLinker member and tax expert, EJ Arboleda clarifies some of the common queries regarding the new tax reform and its impact on Income Tax.

The introduction of the Philippines tax reform bill, TRAIN Law (aka R.A. 10963) has generated a lot of interest regarding Income Tax computation for 2018. For self-employed individuals, it has been of particular interest, because they now have an option to avail of a simpler 8% Income Tax Rate Option.

The BIR (Bureau of Internal Revenue) released Revenue Regulation 8-2018 which details how the income tax changes as per TRAIN will be applied. While this answers a lot of questions, below are answers to queries that may require further clarification.

Who can avail of the 8% Income Tax Rate on Gross Sales/Receipts?

Any self-employed individual whose gross sales/receipts for the year does not exceed P3,000,000 (aka the VAT Threshold) can avail of the 8% Income Tax Rate on Gross Sales/Receipts.

Do I really save money if I go with 8% Income Tax Rate Option?

That exact question sounds so familiar… right, we wrote an article about exactly that: TRAIN’s new 8% Tax – Does it really save you money?

I’m currently registered as VAT though – can I downgrade to non-VAT and opt in to 8% Income Tax Rate?

If your gross sales/receipts and other non-operating income in the preceding year (last year) did not exceed P3,000,000, then you have the option to change your registration to non-VAT until March 31, 2018. You have to do so via a Form 1905 submitted to your RDO.

In this article, you can read more about switching from VAT to non-VAT.

Whew – I’m non-VAT! What happens to my percentage taxes if I opt for 8% Income Tax Rate?

You should submit a Form 1905 to end-date or, essentially, remove “percentage tax” from your registration. If you don’t, you will need to continue submitting quarterly percentage tax returns but with one big difference: the tax dues will always be ZERO and you should include a notation that says you are availing of the 8% income tax rate option. The process to do is similar to filing a Form 1905 to change your RDO.

And what happens to my Quarterly Income Tax returns?

You still need to file your initial quarterly income tax return with a note that says you are availing of the 8% income tax option. The initial quarterly income tax return is either the Q1 tax return or the first quarterly income tax return, you’re supposed to file right after you register. This opting in needs to be done on a yearly basis.

What if I file my Quarterly Income Tax return late or I miss notifying them that I want to opt in?

Then you will have to file your Income Tax Returns using the Graduated Income Tax Table and also file quarterly percentage tax returns. Yup, back to normal PLUS… not certain yet, but you may have to also update your registration via Form 1905 and bring back percentage tax to your registration. Whooptidoo.

Wait wait… so how do I opt in again?

Ok so if you’re eligible, you can opt in by doing the following:

1. End date percentage tax on your registration via Form 1905.
2. If you did not end-date percentage tax, you need to keep submitting a zero-tax value quarterly percentage tax return (2551Q) with a note that says you’re opting in for 8% Gross Sales/Receipts Tax.
3. Submit the initial quarterly income tax return (1701Q) for the year with a note that says you are opting in for 8% Gross Sales/Receipts Tax.
   
   

Note that you can do Steps #2 and #3 above through Taxumo! We can help you file a 2551Q with the necessary notation by April 1. We can also help you file a 1701Q with that notation by May 1 (note that the deadline for 1701Q Q1 has changed to May 15).

So how do I compute for my new tax dues with the 8% Income Tax Rate?

So the first thing you have to answer is: does your income come solely from your business or practice of profession? OR are you a mixed income earner earning from both compensation and your business/profession?

If you’re the first (income solely from business), then use this formula:

Total Income Tax Due = 0.08 * (Gross Sales - 250,000)

If you’re the latter (mixed income), then use this formula:

Total Income Tax Due = (0.08 * Gross Sales) + Tax Due on Compensation

The main difference, as you can see, is that the P250,000 deduction is not applied for Mixed Income earners. Now, before you start rallying out on the streets, the reason is pretty straightforward: the P250,000 has already been deducted when you computed your tax due on compensation so it’s not being applied anymore to the tax from your business. Makes sense, right?

What if I suddenly exceed the VAT threshold?

First of all, congratulations! That’s a good problem to have, rainmaker!

These are the things you’re supposed to do once you exceed the threshold:

1. Submit a Form 1905 to change your tax type to VAT. You have to do this within the month AFTER you exceeded the VAT threshold. So let’s say your gross sales reached P3.1 million in June. That means by July, you should update your tax type to VAT!
2. You have to pay percentage tax from the start of the taxable year until the time you became liable for VAT. Continuing the example above, you’ll file percentage tax covering January to June. You have to pay the whole tax due by July 20 – when the next quarterly tax return is due. If you do so by then, no penalties are applied.
3. Starting July, you are now liable to pay VAT. So that means that on the subsequent months, you’re filing VAT returns: 2550M (Aug, Sep, Nov, Dec) and 2550Q (Oct, Jan following year).
4. For your income tax, you are now back on the Graduated Income Tax Table. Any income taxes paid while you were on the 8% Income Tax Rate option are deducted from your tax due.
   
   

Great! Got it! So how do I file for my 8% Income Tax?

Remember, what I said about there being some unanswered questions? That’s one of them. There are no details yet regarding the specific form to submit once you opt in. There are also no details yet on how frequent the submission of this form is supposed to be (although some sources say the BIR is leaning towards quarterly given the impact on the government’s cashflow if they only receive the cash once a year).

So we’re waiting again?

Yup! The TRAIN introduced a TON of changes so the BIR will need time to iron out the processes to ensure a smooth transition. Every time some new IRR’s are released, we’ll be sure to share them with you!

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