Elucidating the eight percent tax option

On Feb. 20, 2018, the Bureau of Internal Revenue issued Revenue Regulations (RR) No. 8-2018 to implement the income tax provisions of the Tax Reform for Acceleration and Inclusion (TRAIN) Act. The issuance also clarifies certain gray areas in the new law affecting personal income tax including the most buzzed about eight percent tax rate election available to certain self-employed taxpayers.

Pursuant to TRAIN, purely self-employed individuals including professionals whose gross annual sales or receipts and other non-operating income do not exceed the new value-added tax (VAT) threshold of P3 million can elect to be taxed at either:

• eight percent based on gross sales or receipts and other non-operating income in excess of P250,000 or

• the new graduated tax rates of zero to 35 percent based on taxable income.

For individual taxpayers earning both employment and self-employment income, the eight percent tax option shall only be applicable to their self-employment income. To make the election, their gross annual sales or receipts and non-operating income should not exceed P3 million. If so elected, the eight percent tax shall be levied on the gross sales or receipts and other non-operating income without the benefit of a P250,000 deduction while the zero-35 percent graduated tax schedule which considers the P250,000 deduction shall be levied on the employment income.

Under TRAIN, in any of the taxpayer elections discussed above whether by a purely self-employed individual or by a mixed income earner, the eight percent tax not just cancels the liability for the regular income tax but also the liability for the three percent. Other Percentage Tax (OPT) imposed by Section 116 of the Tax Code, as amended. This substitution of a flat eight percent tax for regular income tax and three percent OPT was interpreted in RR No. 8-2018 to mean that only VAT exempt persons or those whose gross annual sales or receipts do not exceed the P3 million threshold and thus, are covered by the three percent OPT imposed by Section 116 of the Tax Code, as amended, can make the eight percent tax election. Accordingly, the implementing regulations cited that the following persons cannot avail of the eight percent tax option:

• A VAT-registered taxpayer, regardless of the amount of gross sales or receipts

• A taxpayer who is subject to OPT under Title V of the Tax Code, as amended, except persons covered by Section 116 of the Tax Code, as amended

• Partners of a General Professional Partnership (GPP)

• Taxpayers engaged in VAT-exempt transactions/activities

The implementing regulations also provide for the administrative guidelines for taxpayers who shall make the election between the eight percent tax and the graduated tax rates, those shifting between these tax regimes and those deregistering for VAT during the year. These guidelines are:

• A non-VAT taxpayer availing of the eight percent tax shall, at beginning of the taxable year and before the filing deadline of the percentage tax return, update and deregister for percentage tax by means of filing the Application for Registration Information Update (BIR Form No. 1905). If a timely update is not performed, they shall file a NIL percentage tax return and make a notation of the election to be taxed at eight percent. In either case, they shall make the election on the Quarterly Income Tax Return for Self-employed Individuals, Estates, and Trusts (Including Those with both Business and Compensation Income) (BIR Form No. 1701Q).

• A non-VAT taxpayer electing the graduated tax rates shall continue to pay percentage tax.

• A non-VAT taxpayer who availed of the eight percent tax but whose gross sales or receipts exceeds the P3 million VAT threshold during the year shall be subject to VAT on the first day of the month following the month when the threshold is breached; percentage tax which is applicable from the beginning of the year until the month of breach is payable within the following month.

• A non-VAT taxpayer who availed of the eight percent tax but whose gross sales or receipts is expected to exceed the P3 million VAT threshold during the year, who volunteers to update his registration shall, on the day of registration update for VAT be subject to VAT; percentage tax which is applicable prior to the registration update is payable on the month following the registration update.

• When shifting from a non-VAT to a VAT registration, a taxpayer who has previously made the election of eight percent tax shall be subject to the graduated tax rates immediately.

• A VAT taxpayer opting to avail of the eight percent tax shall be subject to VAT for as long as there is no update of registration and is also subject to existing rules and regulations for VAT deregistration.

• VAT taxpayers whose gross sales or receipts did not exceed the P3 million VAT threshold in 2017 should update their tax profile to non-VAT no later than March 31, 2018. Otherwise they shall be subject to the preceding three-year period rule under existing regulations to deregister for  VAT.

Amidst these new rules, speculating between the use of the eight percent tax and the graduated tax rates and supposing on its likely costs and benefits, tax or otherwise, become a relentless exercise for affected taxpayers. Is there a taxable income level over which their election of the eight percent tax puts them at an optimal tax position? Or is there an operating income margin that can be considered? What tax and administrative risks will they likely be confronted with? For existing VAT taxpayers who may qualify for the eight percent tax, what changes should they expect? The answers to these taxpayers must explore before making an election.

Karen Jane S. Vergara-Manese is a partner from the Tax Group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice, Tier 1 leading tax transactional firm and the 2016 National Transfer Pricing Firm of the Year in the Philippines by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email [email protected] or [email protected].