The passage of Package 1 of the Tax Reform for Acceleration and Inclusion (TRAIN) law is considered by many a welcome change, particularly to individual taxpayers. After almost two decades, individual income tax rates were finally adjusted. Although the adjustment is said to be the most popular provision in the TRAIN law, there are other rules which an individual taxpayer must take note of.
Implementing rules, computations, and examples are shown in the recent Revenue Regulations (RR) No. 08-2018 in relation to the taxation of individuals. What are the salient points in these regulations that an individual taxpayer should be cautious about?
1. Employees who are NOT qualified for substituted filing
When an employee is qualified for substituted filing, it means that the employee is no longer required to file a separate income tax return. On the contrary, if not qualified for substituted filing, a separate income tax return filing has to be made.
According to RR 08-2018, all individuals deriving compensation income, regardless of amount, from two or more concurrent or successive employers at any time during the taxable year, are not qualified for substituted filing. Thus, they are still required to file a return.
The above rule could mean that even when an employee earns a compensation income not exceeding P250,000 in a taxable year, but such income came from two or more employers in the same taxable year, he should still file his separate income tax return. A question, however, may arise, on whether this is consistent with the intended simplification of tax procedures for those earning less income.
2. P3,000,000 threshold — a number to remember
If you are a self-employed individual, you should always remember the P3,000,000 threshold. This threshold pertains to the self-employed individual’s total sales/gross receipts within a taxable year.
If the total sales/gross receipts do not exceed the threshold, the following are the consequences:
* There is an option to use the 8% income tax rate in lieu of graduated income tax rates and percentage tax. The 8% income tax rate is imposed on the amount exceeding P250,000.
RR No. 08-2018 provides that the intention to opt for the 8% income tax rate must be expressed by the taxpayer in the 1st quarter income tax return or the initial quarter return of the taxable year when the taxpayer commenced business. Such election shall be irrevocable; and thus, the option chosen can no longer be changed. If the choice is not properly made, the individual loses the option to use the 8% tax rate; and thus, they will be subjected to graduated income tax rates.
* The individual, when filing the annual income tax return, is no longer required to attach financial statements to the tax return.
* If an individual does not exceed the threshold, certain types of individual taxpayers are still unqualified to choose the 8% income tax rate. First, this option is not available to VAT-registered taxpayers and taxpayers subject to Other Percentage Taxes. Second, this option does not apply to partners of General Professional Partnerships (GPPs) with respect to their distributive shares. This point is extensively discussed and illustrated in RR No. 08-2018.
* In case the individual avails of the 8% income tax option, but subsequently, earns gross sales/receipts exceeding P3,000,000 during the taxable year, the individual shall automatically be subject to the graduated rates. Any quarterly payments under the 8% income tax rate option may be allowed as tax credit from income tax due.
3. No crossover of the P250,000 tax exempt portion for a mixed income earner availing of the 8% income tax rate.
In the new income tax table, the first P250,000 is not subject to income tax. But what if an individual taxpayer, opting to avail of the 8% income tax rate, both has compensation income and business income? For example, the compensation income is only P200,000 in a taxable year; while his business income is P100,000 in the said year. In this case, to determine the taxable compensation income, the amount of P250,000 tax-exempt will be used; there will be no taxable compensation income, as it is fully covered by the tax-exempt amount. However, the question is whether the “unutilized” P50,000 (P250,000 tax exempt less P200,000 compensation income) can be deducted against the business income.
To answer the concern above, the illustration in RR No. 08-2018 shows that the “unutilized” exempt income is not allowed as a deduction against the business income. The Bureau of Internal Revenue (BIR) explained that the P250,000 tax exempt income is not applicable to the business income of a mixed income earner availing of the 8% income tax rate option, since it is already incorporated in the first tier of the graduated income tax rates applicable to compensation income.
4. Itemized Deduction and Optional Standard Deduction (OSD) is not an option for individuals availing of 8% income tax rate
The computation of 8% income tax is based on gross sales/receipts without deductions, except for sales returns/allowances and sales discounts, subject to certain criteria. Hence, itemized deductions or OSD are not available to individuals availing of the 8% income tax rate.
The lower personal income tax rates offered by the TRAIN law are indeed a pleasant reform for individual taxpayers. As popular as the said provision is, an individual taxpayer should not forget that there are other rules to take note of in order to know their rights, their options, and the related consequences.
Flourence Kathrine S. Enriquez is a manager of the Tax Advisory and Compliance of P&A Grant Thornton.