Over the past few months, two “trains” have been in the news. One of them is a literal train, Metro Manila’s poorly-maintained commuter rail line. The other is TRAIN, or the Tax Reform for Acceleration and Inclusion Law, which promises to raise take-home pay of most Filipinos.
The tax law appears to enjoy the better prospects as it aims to simplify the tax system. The reduction in income tax for individuals and simplified compliance procedures, as implemented by Revenue Regulations (RR) No. 8-2018 and 11-2018, as amended by RRs 14-2018 and 15-2018, were among its notable provisions.
MAXIMIZING TRAIN’S INCENTIVES
Apart from the adjusted graduated income tax rates for individuals, the following features must also be considered for tax planning purposes:
1. The annual exemption for 13th month pay, bonuses and other benefits has been increased from P82,000 to P90,000.
2. There are increased thresholds for de minimis benefits, such as monthly medical cash allowance provided to employees’ dependents from P125 to P250, monthly rice subsidy from P1,500 to P2,000, and uniform allowance from P5,000 to P6,000 per year. These benefits are not subject to both income tax and fringe benefits tax (FBT).
3. Fringe benefits given to non-rank and file employees are subject to 35% FBT, up from the previous rate of 32%. Hence, the grossed-up monetary value is now determined by dividing the actual monetary value by 65%, resulting in an effective FBT rate of 54%. With this effect, companies may need to review their existing fringe benefits to plan what type of fringe benefit they plan to provide so they may take into consideration the non-taxable provisions of the FBT rules for cost planning purposes.
4. Purely self-employed individuals and professionals earning P3 million and below may opt to be taxed under the graduated rates of 0% to 35% or a flat rate of 8% based on gross sales or gross receipts and other non-operating income in excess of P250,000 in lieu of the graduated tax rates and percentage tax.
With this option, taxpayers can plan the tax rate they may apply to their business income based on their prior year’s business performance. Note though, that the tax rate should be elected on the first or initial quarter tax return to be filed for the year. Such election is irrevocable for the whole taxable year.
LEVERAGING THE NEW TAX COMPLIANCE PROCEDURES
The law also introduced certain compliance requirements to simplify the tax filing procedures with the Bureau of Internal Revenue (BIR).
1. Annual income tax returns shall be limited to a maximum of four pages for both paper and electronic form, effective tax year 2018.
2. Certain deadlines were also revised, such as the filing of the first quarter BIR Form 1701Q (Quarterly Income Tax Return for Individuals, Estates and Trusts) which was updated to every 15th day of May, including the deadline for the second installment filing which was moved to the 15th day of October.
Quarterly deadline for the filing and payment of creditable and final withholding taxes (WHT) were also moved to the last day of the month, following the close of the taxable quarter.
3. Required submission to income payors of a sworn declaration of gross sales/receipts by payees whose gross sales/receipts in a taxable year do not exceed P3 million (for individual payees to avail of the 5% WHT) or P720,000 (for non-individual payees to avail of the 10% WHT), as well as those whose income is sourced from a lone income payor and the total income payment is P250,000 or less. The purpose of this is to guide the payor that the lower WHT rate should be used.
Consequently, the income payor shall be required to execute a sworn declaration stating the number of payees who have submitted the sworn declarations as mentioned above, with the accompanying copies of their Certificate of Registration (CoR), including the sworn declaration submitted by the payees.
4. Inclusion of identified top 5,000 individuals and taxpayers identified as Medium Taxpayers, and those under the Taxpayer Account Management Program (TAMP) within the coverage of “top withholding agents,” who are required to withhold 1% and 2% WHT (other than those covered by other withholding tax rates) on purchases of goods and services, respectively.
AREAS OF CLARIFICATION
Like a physical train, some parts of the TRAIN law implementation need to be oiled to work efficiently. There remain certain items which need to be addressed for effective implementation, one of which is a certain section on Revenue Memorandum Circular (RMC) No. 50-2018. Under the circular, premiums paid by the employer under a group insurance policy for all its employees, regardless of position and rank, shall form part of the “other benefits,” subject to the P90,000 exemption ceiling. However, premiums (not part of the group insurance) paid for selected employees holding managerial or supervisory positions are considered fringe benefits subject to fringe benefits tax.
This interpretation seems to run contrary to Section 2.33 (B)(10)(b) of RR No. 3-98 (or the FBT regulations), which treats premiums for managerial/supervisory employees as non-taxable fringe benefits without qualifications. Moreover, if the group insurance premium exceeds the P90,000 exemption threshold, it is unclear who will shoulder the tax on the excess amount — the employer who paid the premium or the employee who enjoyed the benefit?
While regulations and circulars are issued to effectively enforce or amplify the law, how should RR No. 3-98 and RMC No. 50-2018 be read to reconcile both provisions on the taxation of group insurance?
While there is merit in the additional take-home pay from the restructured income tax rates and the simplified, yet comprehensive, tax compliance procedures under the first phase of the tax reform program, there are, however, a few policy lapses, apart from the impact on consumer purchasing power of the consumers (which by the way is another topic). So unless it intends to outperform the railway transport system, the TRAIN Law may need to be revisited and “re-oiled” to live up to its objectives.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
John Klein R. Santos is a Consultant at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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