What’s in and what’s out in 2023?

Each new year is an opportunity for a fresh start and new beginnings. Regardless of what your goals are or how many resolutions you plan to make for 2023, ringing in the new year is a moment to be acknowledged and must be welcomed with a cordial reception.

The year 2023 has officially begun, and it is but right to start the year equipped with the latest updates on taxation so that taxpayers may be guided. This year, there are fresh updates on tax rules that took effect and some are bound to conclude.

For this year, we will see various changes in our tax system brought by the Republic Act (RA) 10963, also known as Tax Reform for Acceleration and Inclusion (TRAIN) Law, and RA 11534 or the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law.

Firstly, under the TRAIN Law, individual taxpayers with annual taxable income amounting to P250,000 or below are still exempt from paying income tax, while the rest of taxpayers, except those with taxable income of more than P8 million will have lower tax rates ranging from 15 percent to 30 percent, previously 20 percent to 32 percent. On the other hand, to maintain a progressive form of taxation, the imposition of an income tax rate of 35 percent has been maintained for individual taxpayers whose annual taxable income exceeds P8 million.

The income tax shall be computed based on the following schedules effective Jan. 1, 2023 and until further amendments to the law are made:

Annual income:

Not over P250,000 - None (zero percent)

Over P250,000, but not over P400,000 – 15 percent of excess over P250,000

Over P400,000, but not over P800,000 – P22,500 plus 20 percent of excess over P400,000

Over P800,000, but not over P2 million – P102,500 plus 25 percent of excess over P800,000

Over P2 million, but not over P8 million – P402,500 plus 30 percent of excess over P2 million

Over P8 million – P2,202,500 plus 35 percent of the excess over P8 million

Compared to the rates imposed at the initial implementation of the TRAIN Law in 2018, the new income tax rates for individuals have been decreased by five percent for those with taxable income of more than P250,000 up to P2 million, while a two percent decrease in the tax rate for those individuals with taxable income of more than P2 million up to P8 million.

Secondly, pursuant to Section 2 of Revenue Regulations (RR) 13-2018, the regulations implementing the Value-Added Tax (VAT) provisions of Train Law, starting Jan. 1, 2023, the filing and payment of VAT returns shall be done on a quarterly basis. The filing of monthly VAT returns (BIR form 2550M) will no longer be required, and VAT taxpayers will only need to file four quarterly VAT returns (BIR form 2550Q) within 25 days following the close of each taxable quarter. This is a relief granted to VAT-registered persons from the burdensome of filing numerous tax returns within a taxable year.

Meanwhile, the CREATE Law was enacted to aid taxpayers from the undue effects of the COVID-19 pandemic by lowering the taxes of certain taxpayers. This year, these certain taxes would revert to their original tax rate.

Firstly, according to Section 116 of the Tax code, as amended, any person whose sales or receipts are exempt under Section 109(CC) of the Code from the payment of VAT and not a VAT-registered person shall pay a tax equivalent to three percent of his or her gross quarterly sales or receipts. Under CREATE Law, the three percent percentage tax was lowered to one percent beginning July 1, 2020 until June 30, 2023. Thus, effective July 1, 2023, taxpayers must pay the original tax rate of three percent.

Secondly, under CREATE and RR 5-2021, the Minimum Corporate Income Tax (MCIT), was lowered to one percent effective July 1, 2020 to 30 June 2023. This means that starting July 1, 2023, the MCIT for corporations (except non-profit proprietary educational institutions and hospitals, and non-resident foreign corporations) will now revert to its original two percent rate based on the gross income of such corporations.

Lastly, under CREATE, the 10 percent income tax for Non-Profit Proprietary Educational Institution and Hospitals was also reduced from 10 percent to one percent effective July 1, 2020 to June 30, 2023, with the qualification that their gross income from unrelated activities shall not exceed 50 percent of their total gross income. Starting July 1, 2023, the tax rate for such institutions will return to the higher 10 percent again.

In view of the foregoing, these may be perceived as a mixture of good news and bad news. Taxpayers may treat the rules on lowering income tax rates and reducing the number of VAT returns to be filed as good news and a welcome development to our tax system. On the other hand, the return to its original tax rates of previously lowered rates pursuant to the reliefs offered by CREATE Law, which will expire by mid-2023 may be frowned upon and as June 30, 2023 approaches, we can expect that there may be taxpayers that will request for an extension until they fully recover from the adversities of the pandemic.

Knowing the “ins” and “outs” of our tax laws can help taxpayers calibrate their actions and plans throughout the year. Truly, it pays to be knowledgeable of the updates on our tax system.

Renier Aries A. Razon is a supervisor from the tax group of KPMG in the Philippines (R.G. Manabat & Co.), a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized as Tier 1 in transfer pricing practice and general corporate tax practice by the International Tax Review. For more information, you may reach out to tax supervisor Renier Aries A. Razon or tax principal Kathleen L. Saga through [email protected], social media, or visit www.home.kpmg/ph.

This article is for general information purposes only and should not be considered professional advice to a specific issue or entity. The views and opinions expressed herein are those of the author and do not necessarily represent KPMG International or KPMG in the Philippines.