by Karen Jane S Vergara-Manese
On February 20, 2018, the Bureau of Internal Revenue issued Revenue Regulations (RR) No. 8-2018 to implement the income tax provisions of the Tax Reform for Acceleration and Inclusion (TRAIN) Act. The issuance also clarifies certain gray areas in the new law affecting personal income tax including the most buzzed about eight percent tax rate election available to certain self-employed taxpayers.
Pursuant to TRAIN, purely self-employed individuals including professionals whose gross annual sales or receipts and other non-operating income do not exceed the new value-added tax (VAT) threshold of P3 million can elect to be taxed at either:
For individual taxpayers earning both employment and self-employment income, the eight percent tax option shall only be applicable to their self-employment income. To make the election, their gross annual sales or receipts and non-operating income should not exceed P3 million. If so elected, the eight percent tax shall be levied on the gross sales or receipts and other non-operating income without the benefit of a P250,000 deduction while the zero-35 percent graduated tax schedule which considers the P250,000 deductoin shall be levied on the employment income.
Under TRAIN, in any of the taxpayer elections discussed above whether by a purely self-employed individual or by a mixed income earner, the eight percent tax not just cancels the liability for the regular income tax but also the liability for the three percent. Other Percentage Tax (OPT) imposed by Section 116 of the Tax Code, as amended. This substitution of a flat eight percent tax for regular income tax and three percent OPT was interpreted in RR No.8-2018 to mean that only VAT exempt persons or those whose gross annual sales or receipts do not exceed the P3 million threshold and thus, are covered by the three percent OPT imposed by Section 116 of the Tax Code, as amended, can make the eight percent tax election. Accordingly, the implementing regulations cited that the following persons cannot avail of the eight percent tax option:
The implementing regulations also provide for the administrative guidelines for taxpayers who shall make the election between the eight percent tax and the graduated tax rates, those shifting between these tax regimes and those deregistering for VAT during the year. These guidelines are:
Amidst these new rules, speculating between the use of th eight percent tax and the graduated tax rates and supposing on its likely costs and benefits, tax or otherwise, become a relentless exercise for affected taxpayers. Is there a taxable income level over which their election of the eight percent tax puts them at an optimal tax position? Or is there an operating income margin that can be considered? What tax and administrative risks will they likely be confronted with? For existing VAT taxpayers who may qualify for the eight percent tax, what changes should they expect? The answers to these taxpayers must explore before making an election.
Karen Jane S. Vergara-Manese is a partner from the Tax Group of KPMG R.G. Manabat & Co. (KPMG RGM@Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice, Tier 1 leading tax transactional firm and the 2016 National Transfer Pricing Firm of the Year in the Philippines by the International Tax Review.
This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM& Co.