So much had been speculated and observed as to the effect of Republic Act 10963, otherwise known as the Tax Reform for Acceleration and Inclusion (TRAIN) Act, on inflation and the cost of basic commodities since it took effect this year. The lack of safety nets to counter the effects of inflation has been the source of much negative comment.
The positive impact of TRAIN on our wallets may only be a “pass-through” as prices of basic commodities and an unpredictable stock market continue to drain us financially, physically and mentally.
But wait! The TRAIN’s impact is not yet over as the close of the calendar year is barely five weeks away. Employers and employees may need to revisit how TRAIN could impact their most common concern at year-end — the annualization of withholding tax on compensation.
WHAT IS ANNUALIZATION?
Annualization is the process of determining the annual income tax due based on the total compensation earned, less all non-taxable earnings, including those from previous employer/s, taking into consideration the amount of taxes withheld, in order to arrive at the adjusted withholding tax due at year-end or as of Dec. 31.
WHAT ARE THE THINGS TO CONSIDER DURING ANNUALIZATION?
• BIR Form 2316 from previous employer
Employees with previous employers should provide their BIR Form 2316 from their previous employer to their current employer. Why? Because the current employer is required to consolidate the earnings from the previous and current employers for proper annualization of total earnings and taxes due for the calendar year.
This will also serve as reference in determining whether or not the employee has exhausted the P90,000 threshold for non-taxable 13th month pay and other benefits.
• Completion and implications of substituted filing survey
Section 51-A of the TRAIN provides that “individual taxpayers receiving purely compensation income regardless of amount, from only one employer in the Philippines for the calendar year, the income tax of which has been withheld correctly by the said employer (tax due equals tax withheld) shall not be required to file an annual income tax return. The certificate of withholding filed by the respective employers, duly stamped “received” by the BIR, shall be tantamount to the substituted filing of income tax returns by said employees.”
Substituted filing applies only to individuals who meet the above conditions, and whose spouse also complies with all the same conditions, or otherwise receives no income.
It is important to identify those employees qualified for substituted filing because there is a requirement to indicate in the alphalist whether or not an employee is qualified for substituted filing.
Those tagged as not qualified for substituted filing will be required to file personal income tax returns (BIR Form 1700 0r 1701, whichever is applicable) by April 15 of the following year.
When consolidating his earnings and taxes as indicated in the BIR Form 2316 issued by his respective employers for the year, the employee may note having a tax liability on his annual income tax return. Such tax liability can be settled by the employee on installment basis, i.e. the first 50% by April 15, then the next 50% by October 15, as provided in Section 56(A)(2) of the TRAIN.
Should the employee fail to file, this would be considered as non-compliance on the part of the employee and not of the employer.
OTHER EMPLOYER CONSIDERATIONS
• Impact of group health insurance per Revenue Memorandum Circular (RMC) 50-2018
The BIR issued RMC 50-2018 which provides clarifications on certain provisions of Revenue Regulations 8-2018 and 11-2018 implementing the Income Tax provisions of the TRAIN. One of the major concerns is the taxation of group health insurance paid by the employer for his employees. The RMC provides that “premium on health card paid by the employer for all employees, whether rank and file or managerial/supervisory, under a group insurance shall be included as part of other benefits of these employees which are subject to the P90,000.00 threshold. However, individual premiums (not part of group insurance) paid for selected employees holding managerial or supervisory functions are considered “fringe benefits” subject to fringe benefits tax”.
As of this time, there is no further clarification issued by the BIR on the said provision. Since employers are required to comply with the existing rules, this would mean additional taxable income on the part of the employee if the employee has exhausted the P90,000 non-taxable threshold.
• Issuance of BIR Form 2316 for taxable year 2018
As of this writing, the BIR has not issued any advisory on whether or not they will update the said form. It is hoped that the BIR will provide this soon so employers and tax practitioners will have ample time to study how to accomplish the form and to update their systems.
WHAT CAN EMPLOYERS DO TO REDUCE THE TAX IMPACT ON EMPLOYEES AT YEAR-END?
Most employers do interim annualization to project the annual tax due of their employees. Such a practice aids their employees in managing their Christmas holiday cash flow as well as the remittance of their taxes by spreading out the tax deductions/payments equally over the last two (or three) months of the year. Some employers remit these taxes in advance for the employees and eventually recover as a deduction in the succeeding payroll.
Whatever practice is being implemented by employers, it should be properly communicated to employees to manage expectations. Good employers plan ahead so that employees will have enough take-home pay during the most festive holiday of the year, and enjoy a Merry Christmas.
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.
Bernadette R. Fama-Absolor is a Manager at the Client Accounting Services group of Isla Lipana & Co., the Philippine member firm of the PwC network.
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