On December 19, 2017, President Rodrigo Duterte signed into law the Tax Reform for Acceleration and Inclusion bill, also known as TRAIN. The tax reform is aimed at generating additional revenue to fund the administration’s infrastructure program while reducing the tax burden of the large majority of the income taxpayers. But how will this impact employees, businesses and entrepreneurs?
Personal income tax
Lower tax rates for (almost) everybody
TRAIN lowers the personal income tax for almost everyone. Those with an annual taxable income below P250,000 will now be exempt from paying taxes while the rest of taxpayers will see a decrease in their tax rates. Only those earning an annual taxable income of more P5 million would see an increase in tax rate from 32% to 35%. The table below shows the differences introduced by TRAIN against the 1997 Tax Code used until January 1st, 2018.
Increase in annual tax exemption for 13th month and other bonuses
TRAIN also increases the annual tax exemption for 13th month and other bonuses from P82,000 to P90,000.
What is the impact for employees?
We have simulated 2 scenarios to illustrate the difference in annual take home pay before and after the reform.
Income tax for self-employed professionals
Starting January, self-employed professionals with an annual gross income not exceeding the new Value Added Tax threshold of PHP 3 million per year will have the option to choose between the new individual tax rates or a flat 8% tax rate on gross receipts in excess of PHP 250,000. Self-employed professionals who opt for the flat 8% tax rate would also not be subject to the 3% percentage tax.
Filing is also simplified. Previously self-employed professionals had to file for percentage tax monthly and income tax quarterly. They only need to file once a year starting 2018.
Value Added Tax threshold and exemptions
TRAIN introduces an increase in the VAT threshold from PHP 1.9 million to PHP 3 million. This means that businesses with annual gross sales below PHP 3 million will be exempt from VAT.
Although the reform repeals 54 VAT exemptions, the following sectors and individuals remain exempt from paying VAT:
- Business with less than PHP 3 million in annual gross sales
- Raw food and agricultural products
- Health and education
- Senior Citizens
- BPOs in special economic zones
- Tourism enterprises
- Renewable energy
- Social housing (PHP 450,000 and below)
- Leases below PHP 15,000 / month
- Low cost housing (PHP 3 million)
How will it work in practice?
While the tax reform is already effective, a number of practical questions about how they are to be implemented remain. A few examples:
- How should a self-employed professional register and select the option for the flat 8% tax rate?
- Would self-employed professionals still be subject to Expanded Withholding Tax (10% or 15%)? This would effectively mean that the withholding tax would be higher than the proposed flat tax rate of 8%.
- Will the new income tax table also impact Fringe Benefit Tax for benefits provided to employees by the company?
The BIR is working on those new rules and regulations and has opened public consultations in January. We are monitoring any releases from them. We will inform you of any updates and how this would impact you and your business.
In the meantime, do not hesitate to contact us if you have any questions or concerns on this.