Now that the tax filing deadline has passed, many taxpayers can breathe a sigh of relief. Taxpayers have gone through one of the most grueling deadlines for the year and have lived to tell about it. Yesterday’s deadline was a bit nostalgic, as it was the last return filed under the old tax system. From now on, we can totally immerse ourselves in the new rules under the Tax Reform for Acceleration and Inclusion (TRAIN) Law. Taxes will now be referred to as “before TRAIN” (BT) and “after TRAIN” (AT).
With April 16 gone, the next income tax filing deadline for individuals will be the first-quarter Income Tax Return (ITR) due on May 15, 2018. Before that date, self-employed individuals need to make a crucial decision. Do they avail of the 8% special tax rate, or follow the regular income tax rate for individuals?
Since the start of the year, when the TRAIN law became effective, many self-employed individuals and small business owners have been keenly following the developing rules for the 8% tax applicable to them. Every time I attend a family gathering, someone would always ask me about the 8% tax and ask how he can avail of it. There have been issuances from the Bureau of Internal Revenue (BIR) that have helped shed light on some of the questions of taxpayers. Since this is a new tax rate, the BIR has to develop rules specifically for implementing this special tax rate. Taxpayers are grappling with the various issuances, trying to understand and comply with them.
The 8% tax is applicable only to self-employed individuals (sole proprietors and professionals) whose gross receipts or gross sales and other non-operating income for the year do not exceed the three million pesos (P3,000,000) value-added tax (VAT) threshold and are not subject to other types of percentage tax. If the small business is owned by a corporation, the 8% tax will not apply. The 8% tax is applicable to various types of business activities that can be undertaken by a sole proprietor, such as the practice of a profession, consultancy services, or convenience store business.
The taxpayer availing of the 8% tax gets to enjoy simplified taxation. He does not need to pay separate income tax and percentage tax, as the 8% tax rate answers for both taxes. He also does not need to account for various expenses when computing taxes. If the self-employed individual is earning purely business income, he simply needs to add up his gross sales or receipts, deduct the non-taxable P250,000, and multiply the difference with the 8% to arrive at his tax payable to the BIR. It’s that simple.
A word of caution, however; the 8% rate should not be an automatic choice for all self-employed individuals. The 8% tax rate is imposed on the gross sales or receipts; no deductions for business expenses are allowed. Hence, the self-employed individual should do his math and check what option would benefit him most. He should compare his tax liability under the 8% tax and the regular income tax of 0% to 35%. However, should he elect to pay under the regular rate of 0% to 35%, he shall continue to pay the 3% percentage tax in addition to the income tax.
The 8% tax is generally preferred for professionals or those engaged in the sale of services where business expenses are normally minimal. For those in businesses that have huge costs of sales and operating expenses, the 8% tax on gross may yield a higher tax payable. However, even with the higher tax, the taxpayer can also factor in his decision making that fact the administrative requirements under the 8% are also simplified.
Partners of a general professional partnership are also not allowed to avail of the 8% tax, as their distributive share from the general professional partnership is already net of cost and expenses.
To avail of the 8% tax, the taxpayer must first cancel his VAT registration or his percentage tax registration. Once that is done, he must elect to apply the 8% income tax rate in his first-quarter income tax return, which is due on May 15. For those who are excited to file their first- quarter income tax return for 2018, a little patience is required; the appropriate form has not yet been released by the BIR. We expect the BIR Form to be issued before the deadline. Hence, taxpayers need to check the BIR website for the announcement of the availability of the form.
Section 12 of Revenue Regulations No. 8-2018 requires percentage taxpayers to submit their taxpayer registration update form (BIR Form 1905) to the BIR to end-date the percentage tax. If taxpayers fail to end-date their percentage tax registration, they must continue to file the percentage tax return reflecting zero-amount of tax with a notation that they are availing of the 8% income tax rate for the taxable year. I have received some messages that there are some BIR offices that refuse to end-date the percentage tax return for taxpayers availing of the 8% tax, despite the regulatory requirements. This situation is probably part of the birthing pains we are still experiencing with the new tax system.
If the taxpayer is VAT-registered and wishes to avail of the 8% tax, he must cancel his VAT registration no later than April 30, 2018. The taxpayer must submit his registration update form to the BIR and surrender his unused VAT invoices and receipts.
In view of the lower income tax rate, the withholding tax collected by clients and customers from their payments of professional, promotional, talent fees, and similar payments for services rendered by self-employed professionals availing of the 8% has also been decreased to 5%. The individual must submit to his client a sworn declaration that his gross sales or receipts for the year do not exceed P3 million, together with a copy of his Certificate of BIR registration showing that he is not VAT-registered. The sworn declaration must be submitted no later than Jan. 15 of each year or at least prior to the initial payment of the fees or commissions subject to 5% withholding tax. Failure to comply will result in the payment of a higher rate of 10% withholding tax.
The 8% tax rate for small business owners is a welcome development in the simplification of our tax system. It is especially helpful to individuals who may be very talented and knowledgeable in their chosen field but may have difficulty in coping with the complicated requirements of taxation. With tax simplification, self-employed individuals can concentrate on making their businesses grow and on improving their skills until, one day, they are small businesses no more.
Eleanor Lucas Roque is the head of the Tax Advisory and Compliance of P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing services firms in the Philippines.