THE TRAIN LAW

Republic Act No. 10963, otherwise known as the “Tax Reform for Acceleration and
Inclusion (TRAIN)” Act was enacted by 17th Congress and was signed into law by
President Rodrigo Roa Duterte in December 19, 2017. The TRAIN act was meant to: (1)
amend outdated provisions of tax laws under the Bureau of Internal Revenue (BIR), (2)
lessen the high personal tax rates which have placed significant burden to taxpayers, and
(3) provide for additional resources that can be used to fund the social and economic
infrastructure that will benefit the poor.

The TRAIN Act significantly affects the income and business taxation for individuals
in terms of exemptions and the revision of graduated and percentage tax rates; but most
of all it improves the take home pays of individual taxpayers by paying lesser income
taxes.

The following are the effects of the TRAIN Act for individual taxpayers:

1. New Personal Income Tax Rates

Personal income tax rates was lowered. The salaried employees earning
annual income of P250,000 or below will be exempted from paying income taxes.

The following tax rate schedules were established for the tax on taxable income
of individuals on annual basis:

(a) Tax Schedule Effective January 1, 2018 until December 31, 2022:

“Not over ₱250,000 0%

“Over ₱250,000 but not over ₱400,000
“Over ₱400,000 but not over ₱800,000
“Over ₱800,000 but not over ₱2,000,000
“Over ₱2,000,000 but not over ₱5,000,000
“Over ₱8,000,000
20% of the excess over ₱250,000
₱30,000 + 25% of the excess over ₱400,000
₱130,000 + 30% of the excess over ₱800,000
₱490,000 + 32% of the excess over ₱2,000,000
₱2,410,000 + 35% of the excess over ₱8,000,000

(b) Tax Schedule Effective January 1, 2023 and onwards:

“Not over ₱250,000 0%

“Over ₱250,000 but not over ₱400,000
“Over ₱400,000 but not over ₱800,000
“Over ₱800,000 but not over ₱2,000,000
“Over ₱2,000,000 but not over ₱8,000,000
“Over ₱8,000,000
15% of the excess over ₱250,000
₱22,500 + 20% of the excess over ₱400,000
₱102,500 + 25% of the excess over ₱800,000
₱402,500 + 30% of the excess over ₱2,000,000
₱2,202,500 + 35% of the excess over ₱8,000,000
 The tax rates was further reduced beginning January 1, 2023 or after five (5) years
which will be permanently used in the computation of income taxes for individuals, unless
amended by congress.

The following tax rate schedules shall be used to computer the weekly, semi-
monthly and monthly withholding taxes for compensation income earners:

REVISED WITHHOLDING TAX TABLE

DAILY 1 2 3 4 5 6
P 685
Compensation P 685 to P 1,096 P 2,192 to P 5,479 to P 21,918
and
Range P 1,095 to P2,191 P 5,478 P 21,917 and above
below
0 P 82.19 P 356.16 P1,342.47 P6,602.74
Prescribed
0 + 20% + 25% + 30% + 32%
Withholding Tax + 35% over
over over P over P over P
P 21,918
P685 1,096 2,192 5,479
WEEKLY 1 2 3 4 5 6
P 4,808 P 15,385 P 38,462
Compensation P 4,808 - P 7,692 - P 153,846
and -P -P
Range P 7,691 P 15,384 and above
below 38,461 153,845
0 P 576.92 P 2,500.0 P9,423.08 P46,346.15
Prescribed
0 + 20% + 25% + 30% + 32%
Withholding Tax + 35% over
over P over P over P 15, over
P 153,846
4,808 7,692 385 38,462
SEMI-
1 2 3 4 5 6
MONTHLY
P 10,417 P 10,417 P 16,667 P 83,333
Compensation P 33,333 P 333,333
and -P -P -P
Range - P83,332 and above
below 16,666 33,332 333,332
P P
0 P 1,250 P 10,416.67
5,416.67 20,416.67
Prescribed
0 +20% + 25% + 30% + 32%
Withholding Tax + 35% over
over over P over P over P
P 333,333
P10,417 16,667 33,333 83,333
MONTHLY 1 2 3 4 5 6
P 20,833 P 20,833 P 33,333 P 66,667 P 166,667
Compensation P 666,667
and -P -P -P -P
Range and above
below 33,332 66,666 166,666 666,666
P P P
0 P200,833.33
2,500.00 10,833.33 40,833.33
Prescribed
0 + 20% + 25% + 30% + 32%
Withholding Tax + 35% over
over P over P over P over P
P 666,667
20,833 33,333 66,667 166,667

2. Lower Tax Rates for Professionals

Self-employed professionals will now pay lower taxes as well with the reduced
tax rates for professionals, as follows:
 ANNUAL SALES OR GROSS
TAX RATE
RECEIPTS
P250,000 and below 0%
May choose either 8% flat tax on gross
Below P3 million
receipts or follow personal income tax table
Above P3 million Subject to personal income tax table

Professionals will no longer have to file and pay for the percentage tax and instead,
they will be charged with a withholding tax of 8% flat rate on gross sales or receipts.

Self-employed professionals earning annual income of P3 million and below may

choose to pay the 8% flat rate or follow the personal income tax table; while those earning
above P3 million has to follow and pay according to the personal income tax table.

The amount of P3 million is the new value-added tax (VAT) threshold that was
defined in the TRAIN Act; meaning, those self-employed individuals and professionals
earning gross sales or receipts of less than P3 million shall not pay the value added tax
(VAT) and those earning gross sales or receipts of P3 million shall be subject to value
added tax (VAT).

3. Tax on 13th Month Pay and Other Bonuses

The threshold for tax exemption on 13th month pay and other bonuses received
by salaried employees has been raised from the current P82,000 to P90,000. This means
that 13th month pay and bonuses paid to employees that amount to P90,000 or below
will not be taxed

INCOME AND BUSINESS TAXATION

There are two common taxes imposed by the government: (1) an income tax for
individuals, and (2) business tax for businesses.

INDIVIDUAL INCOME TAX

Individual Income Tax is a tax on a person’s income, emoluments, profits arising
from property, practice of profession, conduct of trade or business or on the pertinent
items of gross income specified in the Tax Code of 1997 (Tax Code), as amended, less
the deductions, if any, authorized for such types of income, by the Tax Code, as amended,
or other special laws (www.bir.gov. ph).
 The individual taxation is categorized into the following ( source: www.bir.gov.ph &
BIR Revenue Regulations No. 8-2018):

1. Resident citizens (RC) receiving income from sources within or outside the
Philippines. These are:

 Compensation Income Earners

These are individuals whose source of income is purely derived from
an employer-employee relationship. This includes the Minimum Wage
Earner (MWE) who works in the private sector and who is paid with a
statutory minimum wage (SMW) rates, or who is an employee in the public
sector with compensation income of not more than the statutory minimum
wage rates in the non-agricultural sector where the worker/employee is
assigned. Such statutory minimum wage rates are exempted from income
tax. Likewise, the exemption covers the holiday pay, overtime pay, night
shift differential pay, and hazard pay earned by an MWE.

The compensation income earned by the compensation income

earners means all remuneration for services performed by an employee for
his employer under an employer-employee relationship, unless specifically
excluded by the Tax Code. These are, salaries, wages, emoluments and
honoraria, allowances, commissions (e.g. transportation, representation,
entertainment and the like); fees including director’s fees, if the director is,
at the same time, an employee of the employer/corporation; taxable
bonuses and fringe benefits, except those which are subject to the fringe
benefits tax under Sec. 33 of the Tax Code and the allowable “de minimis”
benefits; taxable pensions and retirement pay; and other income of a similar
nature constitute compensation income.

Below are examples to illustrate the computation of individual income tax using the
annual personal income tax table and the weekly, semi-monthly and monthly withholding
tax table.

Illustration 17.
Mr. Kenneth dela Cruz, a Financial comptroller of JADGC Company, earned
annual compensation in 2017 of P1,800,000.00, inclusive of 13th month and other
benefits in the amount of P150,000.00 but net of mandatory contributions to SSS, Pag-
ibig and Philhealth.

Computation of tax using the annual personal income tax table:

TAX DUE ON COMPENSATION INCOME

AMOUNT
Total Compensation Income 1,800,000
Less: Non-taxable 13th month and other benefits (maximum) 90,000

Taxable Compensation Income 1,710,000

Tax Due on Compensation:

On P800,000 130,000
On excess (P1,710,000 - P800,000) x 30% 273,000
Tax Due 403,000

Illustration 18.
An employee is receiving a daily compensation in the amount of P2,000, net of
mandatory contributions.

Computation:
By using the daily withholding tax table above, the withholding tax is computed by
referring to compensation range under column 3 which shows a predetermined tax of
P82.19 on P1,096.00 plus 25% of the excess of the minimum compensation range
amounting to P904 (P2,000 – P1,096) multiplied by 25%, which is P226. As such, the
total withholding tax to be withheld by the employer shall be P308.19

.Illustration 19.
An employee is receiving a weekly compensation in the amount of P16,500, net
of mandatory contributions.

Computation:
By using the weekly withholding tax table, the withholding tax is computed by
referring to compensation range under column 4 which shows a predetermined tax of
P2,500 on P15,385 plus 30% of the excess of minimum compensation range amounting
to P1,115 (P16,500 – P15,385) multiplied by 30%, which is P334.50. As such, the total
withholding tax to be withheld by the employer shall be P2,834.50.
Illustration 20.
An employee is receiving semi-monthly compensation in the amount of P95,000,
net of mandatory contributions.

Computation:
By using the semi-monthly withholding tax table, the withholding tax is computed
by referring to compensation range under column 5 which shows a predetermined tax of
P20,416.67 on P83,333.33 plus 32% of the excess of minimum compensation range
amounting to P11,667 (P95,000 – P83,333) which is P3,733.44. As such, the withholding
tax to be withheld by the employer shall be P24,150.11.

Illustration 21.
An employee is receiving monthly compensation in the amount of
P750,000 with supplemental compensation in the amount of P50,000, net of mandatory
contributions.

Computation:
By using the monthly withholding tax table, the withholding tax is computed by
referring to compensation range under column 6 which shows a predetermined tax of
P200,833.33 on P666,667.00 plus 35% of the excess minimum compensation range
amounting to P133,333.00 (P750,000 + P50,000 – P666,667.00) multiplied by 35%.
which is P46,666.55. As such, the withholding tax to be withheld by the employer shall be
P247,499.88.

 Mixed Income Earners

These are individuals earning compensation income from
employment, and income from business, practice of profession and/or other
sources aside from employment.

Illustration 22.
Mr. Jake Briones, a Comptroller of EQUATE Inc., earned annual compensation in
2017 of P2,500,000, inclusive of 13th month and other benefits in the amount of P300,000
but net of mandatory contributions to SSS, Pag-ibig and Philhealth. Aside from
employment income, he owns an auditing company, with gross revenues of P2,000,000.
His operating expenses are P1.200,000, respectively, and with non-operating income of
P100,000.00.
Option 1: Eight Percent (8%) income tax rate on Gross Revenues
The tax due of Mr. Jake Briones for 2017 shall be computed, if he opted to be
taxed at eight percent (8%) income tax rate on his gross revenues for his income from
business, as follows:

A. TAX DUE ON COMPENSATION INCOME

Total Compensation Income 2,500,000
Less: Non-taxable 13th month and other benefits (maximum) 90,000

Taxable Compensation Income 2,410,000

Tax Due on Compensation:
On P2,000,000 490,000
On excess (P2,410,000 - P2,000,000) x 32% 131,200
Tax Due (A) 621,200

B. TAX DUE ON BUSINESS INCOME

Gross Revenues 2,000,000
Add: Other non-operating Income 100,000
Taxable Business Income 2,100,000
Multiplied by Income Tax Rate 8%
Tax Due on Business Income (B) 168,000

TOTAL INCOME TAX DUE (Compensation & Business Income) A + B 789,200

Comments on above computation:

(a) The option of eight percent (8%) income tax rate is applicable only to taxpayer’s
income from business, and the same is in lieu of the income tax under the
graduated income tax rates and the percentage tax under Section 116 of the Tax
Code, as amended.

(b) The amount of P250,000 allowed as a deduction under the law for taxpayers
earning solely from self-employment/practice of profession is not applicable for
mixed-income earner under the 8% income tax rate option.

(c) The P250,000 mentioned above is already incorporated in the first tier of the
graduated income tax rates applicable to compensation income.

Option 2: NOT Opting for 8% income tax on Gross Revenues and other non-
operating income
 The tax due of Jake Briones for 2017 shall be computed, if he did not opt for the
eight percent (8%) income tax based on gross revenues and other non-operating income,
as follows:

Total Compensation Income 2,500,000

Less: Non-taxable 13th month and other benefits (maximum) 90,000

Taxable Compensation Income 2,410,000

Add: Taxable Income from Business
Gross Revenues 2,000,000
Less: Operating Expenses 1,200,000
Net Operating Income 800,000
Add: Non-Operating Income 100,000 900,000

Total Taxable Income 3,310,000

Tax Due on Compensation and Income from Business:

On P2,000,000 490,000
On excess (P3,310,000 - P2,000,000) x 32% 419,200

TOTAL INCOME TAX DUE (Compensation & Business Income) 909,200

Comments on above computation:

(a) The taxable income from both compensation and business shall be combined for
purposes of computing the income tax due if the taxpayer chose to be subject
under the graduated income tax rates.

(b) In addition to the income tax, Mr. Briones is likewise liable to pay percentage tax
of P60,000.00, which is 3% of P2,000,000; since self-employed individuals earning
less than the VAT threshold of P3 million and has not opted to pay for the fixed
rate of 8% on gross sales or receipts are subject to percentage tax on gross
sales/receipts of 3%.

Illustration 23.
Mr. Lawrence Pendililang a senior officer of Equate Manufacturing Corp., earned
in 2017 an annual compensation of P1,800,000, inclusive of the 13th month and other
benefits in the amount of P200,000. He also owns a bookkeeping company, with gross
revenues of P4,000,000. His operating expenses are P1,800,000.00, with non-operating
income of P200.000.00.

The computation of his tax due for 2017 shall be computed as follows:
Total Compensation Income 1,800,000
Less: Non-taxable 13th month and other benefits (maximum) 90,000

Taxable Compensation Income 1,710,000

Add: Taxable Income from Business
Gross Revenues 4,000,000
Less: Operating Expenses 1,800,000
Net Operating Income 2,200,000
Add: Non-Operating Income 200,000 2,400,000

Total Taxable Income 4,110,000

Tax Due on Compensation and Income from Business:

On P2,000,000 490,000
On excess (P4,110,000 - P2,000,000) x 32% 675,200

TOTAL INCOME TAX DUE (Compensation & Business Income) 1,165,200

Comments on above computation:

The taxpayer has no option to avail of the 8% income tax rate on his income from
business since his gross sales exceed the VAT threshold of P3 million. He is not subject
percentage since his business is vatable and is subject to 12% VAT rate on gross sales
or receipts.

The above individuals are in Section (D) of the BIR’s Revenue Regulations (RR)
No. 8-2018, specifically - Individuals Earning Income Both from Compensation and
from Self-Employment (business or practice of profession:

The following were further discussed and highlighted by BIR Revenue Regulations
No. 8-2018:

For mixed income earners, the income tax rates applicable are:
1. The compensation income shall be subject to the tax rates prescribed under
Section 24(A)(2)(a) of the Tax Code, as amended; AND

2. The income from business or practice of profession shall be subject to the

following:
(a) lf the gross sales/receipts and other non-operating income do not exceed the
VAT threshold, the individual has the option to be taxed at:
a.1 Graduated income tax rates prescribed under Section 24(A)(2)(a) of the
Tax Code, as amended; OR
 a.2 Eight percent (8%) income tax rate based on gross sales/receipts and
other non-operating income in lieu of the graduated income tax rates and
percentage tax under Section 116 of the Tax Code, as amended.

(b) If the gross sales/receipts and other non-operating income exceeds the VAT
threshold, the individual shall be subject to the graduated income tax rates
prescribed under Section 24(A)(2)(a) of the Tax Code, as amended.

The provision under Section 24(A)(2)(b) of the Tax Code, as amended, which
allows an option of 8% income tax rate on gross sales/receipts and other non-operating
income in excess of P250,000.00 is available only to purely self-employed individuals
and/or professionals.

The P250,000.00 mentioned is not applicable to mixed-income earners since it is

already incorporated in the first tier of the graduated income tax rates applicable to
compensation income. Under the said graduated rates, the excess of the P250,000.00
over the actual taxable compensation income is not deductible against the taxable income
from business/practice of profession under the 8% income tax rate option.

The total tax due shall be the sum of:

a. tax due from compensation, computed using the graduated income tax rates; and
b. tax due from self-employment/practice of profession, resulting from the
multiplication of the 8% income tax rate with the total of the gross sales / receipts
and other non-operating income.

Mixed income earner who opted to be taxed under the graduated income tax rates
for income from business/practice of profession, shall combine the taxable income from
both compensation and business/practice of profession in computing for the total taxable
income and consequently, the income tax due.

 Self-employed Individuals
They are sole proprietors or independent contractors who report
income earned from self-employment. They control who they work for, how
the work is done and when it is done. This category includes those hired
under a contract of service or job order, and professionals whose income is
derived purely from the practice of profession and not under an employer-
employee relationship.
 The following are relevant items on taxation of Self-Employed and Professionals
from BIR’s Revenue Regulations (RR) No, 8-2018:

“Individuals earning income purely from self-employment and/or practice of

profession whose gross sales/receipts and other non-operating income does not exceed
the value-added tax (VAT) threshold as provided under Section 109 (BB) of the Tax Code,
as amended, shall have the option to avail of:
1. The graduated rates under Section 24(A)(2)(a) of the Tax Code, as amended;
OR
2. An eight percent (8%) tax on gross sales or receipts and other non-operating
income in excess of two hundred fifty thousand pesos (P250,000.00) in lieu of the
graduated income tax rates under Section 24(A) and the percentage tax under Section 1
16 all under the Tax Code, as amended.

Unless the taxpayer signifies the intention to elect the 8% income tax rate in the
1st Quarter Percentage and/or Income Tax Return, or on the initial quarter return of the
taxable year after the commencement of a new business/practice of profession, the
taxpayer shall be considered as having availed of the graduated rates under Section
24(A)(2)(a) of the Tax Code, as amended. Such election shall be irrevocable and no
amendment of option shall be made for the said taxable year.

The option to be taxed at 8% income tax rate is not available to a VAT-registered

taxpayer, regardless of the amount of gross sales/receipts, and to a taxpayer who is
subject to Other Percentage Taxes under Title V of the Tax Code, as amended, except
those subject under Section 116 of the same Title. Likewise, partners of a General
Professional Partnership (GPP) by virtue of their distributive share from GPP which is
already net of cost and expenses cannot avail of the 8% income tax rate option.

A taxpayer who signifies the intention to avail of the 8% income tax rate option,
and is conclusively qualified for said option at the end of the taxable year [annual gross
sales/receipts and other non-operating income did not exceed the VAT threshold
(P3,000,000.00)] shall compute the final annual income tax due based on the actual
annual gross sales/receipts and other non-operating income. The said income tax due
shall be in lieu of the graduated rates of income tax and the percentage tax under Sec.
116 of the Tax Code, as amended. The Financial Statements (FS) is not required to be
attached in filing the final income tax return. However, existing rules and regulations on
bookkeeping and invoicing/receipting shall still apply.

A taxpayer shall automatically be subject to the graduated rates under Section

24(A)(2)(a) of the Tax Code, as amended, even if the flat 8% income tax rate option is
initially selected, when taxpayer’s gross sales/receipts and other non operating income
exceeded the VAT threshold during the taxable year. In such case, his income tax shall
be computed under the graduated income tax rates and shall be allowed a tax credit for
the previous quarter/s income tax payment/s under the 8% income tax rate option.

In addition, a taxpayer subject to the graduated income tax rates (either selected
this as the income tax regime, or failed to signify chosen intention or failed to qualify to
be taxed at the 8% income tax rate) is also subject to the applicable business tax, if any,
subject to the provisions of Section 8 of these Regulations, an FS shall be required as an
attachment to the annual income tax return even if the gross sales/receipts and other
non-operating income is less than the VAT threshold. However, the annual income tax
return of a taxpayer with gross sales/receipts and other non-operating income of more
than the said VAT threshold shall be accompanied by an audited financial statements.

Taxable income for individuals earning income from self-employment/practice of

profession shall be the net income, if taxpayer opted to be taxed at graduated rates or
has failed to signify the chosen option. However, if the option availed is the 8% income
tax rate, the taxable base is the gross sales/receipts and other non-operating income.”

Illustration 24.
Ms. Danielle Villaviza operates a mini grocery store while she offers bookkeeping
services to her clients. In 2017, her gross sales amounted to P1.000,000, in addition to
her receipts from bookkeeping services of P800,000. She already signified her intention
to be taxed at 8% income tax rate in her 1st quarter return.

Her income tax liability for the year will be computed as follows:

Gross Sales - Mini-grocecy Store 1,000,000

Gross Receipts - Bookkeeping Services 800,000
Total Sales & Receipts 1,800,000
Less: Allowable deduction 250,000

NET TAXABLE INCOME 1,550,000

Tax Due:
8% x P1,550,000 124,000

Comments on the above computation:

(a) The total of gross sales and gross receipts is below the VAT threshold of
P3,000,000.
 (b) The taxpayer’s source of income is purely from self-employment, thus she is
entitled to the amount allowed as deduction of P250,000.

(c) The income tax that is imposed on the above is based on the total of gross sales
and gross receipts and in lieu of the graduated income tax rates and the
percentage tax for vat exempt business.

Illustration 25.
Ms. Danielle Villaviza (on illustration 24) failed to signify her intention to be taxed
at 8% income tax rate on gross sales in her initial Quarterly Income Tax Return. She
incurred total cost and operating expenses for the two businesses amounting to
P1,250,000.

Gross Sales - Mini-grocery Store 1,000,000

Gross Receipts - Bookkeeping Services 800,000
Total Sales & Receipts 1,800,000
Less: Cost and expenses 1,250,000

NET TAXABLE INCOME 550,000

Tax Due:
First P400,000 30,000
Excess (P550,000 - P400,000) x 25% 37,500
Total Tax Payable 67,500

Comments on the above computation:

The taxpayer will pay her income tax based on the graduated income tax rates
table because she failed to signify her intention to be taxed at 8%. Aside from the income
tax due above, she is likewise liable to pay business tax.

Illustration 26.
Mr. Mark Angelo is an independent contractor who is into general contracting
services. For the taxable year 2017, his total gross receipts amounted to P5,750,000. The
business incurred cost of services and operating expenses amounting to P4,250,000.

Her income tax liability will be computed as follows:

Gross Receipts 5,750,000
Less: Cost and expenses 4,250,000

NET TAXABLE INCOME 1,500,000

Tax Due:
First P800,000 130,000
Excess (P1,500,000 - P800,000) x 30% 210,000
Total Tax Payable 340,000

Comments on the above computation:

The gross receipts exceeded the VAT threshold of P3,000,000 which is already
subject to the following:
(a) graduated income tax rates
(b) business tax – VAT, in addition to income tax.

(d) Resident citizens (RA) receiving income from sources within the Philippines
who may be is employed or self-employed.

(e) Non-resident aliens engaged in trade and business (NRAETB) – refers to a

non-resident alien who shall come to the Philippines and stay for an
aggregate period of more than one hundred eighty (180) days during any
calendar year.

(f) Non-resident aliens not engaged in trade and business (NRANETB) – refers
to a nonresident alien who shall come to the Philippines and stay for an
aggregate period of one hundred eighty (180) days or less during any
calendar year.

(g) Marginal income earners are individuals whose business do not realize
gross sales or receipts exceeding PhP100,000.00 in any 12-month period
(Revenue Regulations No. 7-2012; Revenue Memorandum Circular No. 7-
2014).

For employees deriving purely compensation income from a single employer

during a calendar year and whose income tax has been withheld correctly, the employees
will be reported to the BIR annually by their employers through the Alphalist BIR Form
1604-CF. Correspondingly, the employees will be issued by the employers with BIR Form
2316 as proof of their earnings and income tax in lieu of not filing the BIR Form 1700,
which is called substituted filing.

BUSINESS TAX
Business tax is tax imposed by the government to businesses for the income
earned during a certain period. These businesses are the partnerships and corporations.
Unlike the tax for individuals which is straightforward and only a few, the taxes for
business are quite numerous that range from fixed to percentage types of taxes. These
are also based either on the gross revenues or gross income or net income.

There are two kinds of taxes for business: local taxes and national taxes. The local
taxes are paid through the municipal government, which are governed by the Local
Government Code of the Phils., while the national taxes are paid through the Bureau of
Internal Revenues (BIR).

The national government taxes are governed by the National Internal Revenue
Code. A business pays more taxes on a national level than on a municipal level.

The following are the most common taxes that a business pays to the national
government through the BIR:

Value Added Tax (VAT)

This is paid monthly and quarterly using BIR form 2550M and 2550Q for VAT
registered business. This is the tax charged on the selling price.

Some business owners regard this as high but the key point here is that the tax
that you will pay is just based on the “amount” that you added to your purchase cost. It is
because the VAT that you have paid on your purchases is credited to the VAT that you
levied on your selling price, which results to the net vat on your gross margin or mark-up.
If you have a large profit margin, you will be paying more value added tax even if you do
not earn any net profit.

There are also transactions that are VAT -exempt or VAT zero-rated. Only the BIR
can allow this type of accreditation.

Percentage tax
This is paid monthly using BIR form 2551M which is the tax that you will pay if you
are not a VAT registered business and has not opted to pay the 8% income tax. The
amount payable is computed as a percentage of your sales.

Capital gains tax

 This is the tax paid if you sell real property classified as a capital asset. The term
of the tax is a little confusing since the term capital that is used in the earlier chapters of
this book refers to the investments of owner for the business.

Income tax
This is a tax that is paid quarterly using BIR form 1701Q and annually using BIR
form 1701. This is the tax paid based on the net profit of the business.

Withholding taxes
The taxes that you will pay to BIR on this category will come from the amounts you
deduct from your payments to vendors and employees. In effect, you are serving as an
advanced collecting agent for the government.

There are many other taxes that are not listed above that a business owner should
know about also. With the large impact of taxes on our finances, it is important that you
have at least a basic understanding of this business taxation.

SOURCES OF BUSINESS INCOME AND DEDUCTIONS

The taxable gross income from business and corresponding deductions are
different from that of individuals. While individual’s taxable gross income can be mixed
which are coming from personal services like compensation income or practice of
profession or income from a business and the deductions are fixed and defined by law
through the NIRC; the taxable gross income from a business are derived from which the
business is purposely established plus other income generated in the course of the
conduct of the business. Though the expenses are defined by the NIRC, these are not
fixed. These can be claimed as legal deductions whatever they are as long as these are
incurred in the course of generating the taxable income.

The taxable gross income of a business can generally be:

 Revenues or income generated from the sale of a commodity or rendering of
services.
 Interests received on a bank deposits.
 Gain on the sale of fixed assets.
 Rental received on a leased property.
 Professional fees earned.

The taxable gross income above may be subject to income tax or final taxes. The
final taxes have different rates depending on the classifications. Examples of the income
subject to final taxes are interest income on bank deposits, gain on sale of capital assets,
dividends and others that are defined by NIRC.

What are allowable deductions from the taxable gross income?

1. Optional Standard Deductions (OSD)

Both individual taxpayers and corporations have the option to claim Optional
Standard Deductions (OSD) if the taxpayer will not avail of the itemized
deductions.

For individual taxpayers, a maximum of 40% based on their taxable gross

receipts or income or sales shall be allowed as deduction instead of the itemized
deduction.

2. Itemized Deductions
These deductions from taxable gross income include all ordinary and
necessary business or trade expenses incurred during the taxable year in carrying
on or which are directly attributable to the development, management, operation
and conduct of the business.

Certain expenses, such as interest, bad debts, taxes, entertainment,

charitable contributions and other expenses have been set with limitations and
exemptions in claiming as deductions against the taxable gross income.

Generally these are:

 The cost of goods sold in a merchandising business.
 Commissions earned by the sales employees.
 Rent expense for the occupied space of the business.
 The cost of the electricity and water used.
 Advertising that took place.
 Wages, salaries and benefits for the employees.
 Depreciation expenses for the amortization of fixed assets.
 Losses, like inventory obsolescence.
 Interest expenses for loans.
 Travel and transportation expenses.
 Entertainment expenses
 Taxes and licenses paid to government agencies.
 Bad Debts for uncollectible receivables deemed worthless.
 Charitable contributions and other allowed contributions.
  Research and development.
 Pension trusts.
 Premium payments on SSS/HDMF/PHIC or health or hospitalization
insurance.
 And other expenses that may be allowed as itemized deductions by the
NIRC.

In filing the business income tax return of an individual as a sole proprietor through
BIR Form 1701, the Bureau of Internal Revenue (BIR) requires the financial statements
to be audited, examined and certified by an independent Certified Public Accountant
(CPA); except for the threshold set by the tax code per section 232 of the NIRC which
shall not exceed gross receipts of P50,000 per quarter. This quarterly output of P50,000
requires only simplified bookkeeping records duly approved by the Secretary of Finance.

How to compute the income tax due of a sole proprietor taxpayer with a merchandising
business?
 Get the details of the taxpayers. These are his:
 Tax Identification Number (TIN)
 Present address
 Date of birth
 Community tax certificate

 Get the statement of income and the taxes withheld through BIR Form 2307 which
is issued by withholding tax agents to their payees, whom they have withheld
taxes.

 Determine the net taxable income of the business.

 Compute the tax due either on the following that maybe elected by the taxpayer:

a. using the graduated tax table for self-employed individuals

b. Using the OSD rate of 40%
c. Using the 8% on gross income for self-employed within the P3,000,000
threshold and has opted to elect this type of taxation at first filing

 Using the total tax due, deduct from it the withholding taxes from BIR Form 2307
to come up with the net tax due payable.

Illustration 27
 Using the following statement of income of Jeric Merchandising for the year then
ended December 31, 2017, compute the net tax due of the business.

The following are the details of the proprietor:

a. Name of the proprietor is Jeric P. Centeno.
b. Married and born in March 4, 1984
c. TIN 138-002-107
d. Address at 543 Jay St., Brgy Sunvalley, Paranaque City, under RDO 052
e. CTC # 18729902, issued at Taguig, Jan 22, 2018.
f. Total BIR Form 2307 is P44,195.

Trial balance of Jeric Merchandising which is owned by Jeric P. Centeno:

JERIC MERCHANDISING
Statement of Income
For the Year Ended Dec 31, 2016

Gross Sales 4,500,000.00

Less: Sales returns & allowances 56,500.00
Salels discounts 24,000.00 80,500.00
Net Sales 4,419,500.00
Deduct: Cost of Goods Sold
Merchandise inventory, Jan 1 75,000.00
Add: Purchases 2,200,000.00
Freight in 75,000.00
Total 2,275,000.00
Less: Purchase returns (350,000.00)
Purchase discounts (150,000.00) 1,775,000.00
Total Goods Available for sale 1,850,000.00
Less: Merchandise inventory, Dec 31 525,000.00 1,325,000.00
Gross Income 3,094,500.00
Less: Operating Expenses
Freight out 65,000.00
Salaries, wages & benefirs 147,000.00
Sales commissions 441,950.00
Depreciation expenses 80,666.00
Rent expense 120,000.00
Light and water 172,020.00
Store supplies expense 29,100.00
Insurance expense 33,750.00
Communication expense 10,000.00
Uncollectible account expense 9,550.00 1,109,036.00
Net Income 1,985,464.00

A. Computation of tax due if the sole proprietor opted to use the itemized deduction:
TAXPAYER'S NAME Jeric P. Centeno
ADDRESS 543 Jay Street, Brgy Sunvalley, Paranaque City
TIN 138-002-107

Net Sales 4,419,500.00

Less: Cost of Goods Sold 1,325,000.00
Gross Income 3,094,500.00
Less: Operating Expenses 1,109,036.00
Net Income 1,985,464.00

Computation of tax due:

Tax Equivalent
First Php 800,000 130,000.00
Next Excess (Php 1,985,464 - 800,000) x 30% 355,639.20
Total tax due 485,639.20
Less: Withholding taxes 21,195.00
Tax still due and payable 464,444.20

The use of itemized deduction method means that the Bureau of Internal Revenue
(BIR) has allowed the taxpayer to use all allowable expenses as provided for in the NIRC
to be deducted from the gross sales or receipts of a taxpayer in a particular taxable period.
These allowable expenses are recorded in the taxpayer’s the books of accounts and
summarized in the trial balance. By electing this method, the taxpayer shall likewise be
examined by the BIR officers if the taxable period is still within the prescribed period of
three (3) years that an individual is subject to examination.

B. Computation of tax due if the sole proprietor opted to use the Optional Standard
Deduction (OSD):
TAXPAYER'S NAME Jeric P. Centeno
ADDRESS 543 Jay Street, Brgy Sunvalley, Paranaque City
TIN 138-002-107

Computation of taxable income:

Net sales from business 4,419,500.00
Less: Optional Standard Deduction (OSD)
Net Sales 4,419,500.00
Multiplied by: OSD Rate 40%
Allowed deduction 1,767,800.00 1,767,800.00

Taxable income 2,651,700.00

Computation of tax due:

First Php 2,000,000 490,000.00
Next Excess (Php 2,651,700 - 2,000,000) x 32% 208,544.00
Total tax due 698,544.00
Less: Withholding taxes 44,195.00
Tax still due and payable 654,349.00

The use of standard optional deduction (OSD) method means that the Bureau of
Internal Revenue (BIR) has allowed the taxpayer to use the rate of 40% percent on gross
sales/receipts as the allowable deduction from the gross sales/receipts to arrive at a
taxable income as basis for the computation of income tax; instead of using the allowable
expenses as provided for in the NIRC that were incurred by the taxpayer in a particular
taxable period. By electing this method, the taxpayer shall not anymore be examined by
the BIR officers.

The BIR form that will be used in filing the income tax of a business for a sole
proprietor is Form 1701 for either using the itemized deduction or Optional Standard
Deduction (OSD) method. The Forms 2307 which are proof of taxes withheld shall
accompany this Income Tax Return (ITR) Form 1701.

The choice between OSD and itemized deduction will not be an easy decision for
a taxpayer because the best advantage of saving tax payments will be considered.
Businesses who are heavy on expenses or spend more than 40% on sales will favor the
itemized deduction while individuals into service business whose expenses will not reach
40% will favor the OSD.

The computation above of a Standard Optional Deduction (OSD) for Jeric

Merchandising will tell you that OSD is not an advantage option for the taxpayer as he
will be paying more taxes than an itemized deduction.
 On the other hand, you might avail of the OSD for the following reasons:
 The substantiation of your expenses may not be in accordance with the BIR
regulations or have no substantiation at all;

 You are an individual and for cost cutting purposes, you would not want a Certified
Public Accountant (CPA) to conduct an audit.

THE TAX SYSTEM AND THE CYBER-AGE

The present tax system of the Bureau of Internal Revenues requires individuals
and businesses to file the income taxes though the following: (1) Electronic Filing and
Permanent System (eFPS) or (2) eBIRForms System.

The new developments in the world have taken steps for the Bureau of Internal
Revenues (BIR) to embrace new systems in collecting revenues for the government. Its
aim is to (1) address the influx of taxpayers who inconveniently go into their offices to pay
for the taxes, (2) reduce paper works or implement a paper-less filing of taxes, (3) collect
revenues on time or ahead of time, (4) let taxpayers manage their time-compliance in
paying taxes, and (5) make use of new technologies for easier paying and processing of
tax payments.

Electronic Filing and Payment System (eFPS)

The BIR had introduced the eFPS long before to selective taxpayers and recently
launched to include all taxpayers when internet can be accessed by and easily available
to ordinary taxpayers. Filing and payment of taxes can now be done by the taxpayers
anywhere else in the world using the internet access. Payment can be done through the
BIR accredited agent banks which can be availed of the taxpayers for their convenience
without necessarily going to the bank to file and pay for the taxes. This facility can be
accessed through the BIR website http://www.bir.gov.ph , then select the icon at the
bottom of the page to access eFPS Homepage. Or type https://eFPS.bir.gov.ph in the
browser’s URL/address.

eBIRForms System
There is an alternative e-service that the BIR provided to the taxpayers in preparing
and filing of tax returns when a taxpayer has no capability of availing of the eFPS because
this method requires maintenance of a bank account that is accredited by the BIR. The
bank account can be expensive because these banks normally requires account holder
to maintain in his account a high average daily balance.
 This mode is called the Electronic Bureau of Internal Revenue Forms
(eBIRForms). Instead of the conventional manual process of filling up tax returns on pre-
printed forms, taxpayers can download the Offline eBIRForms package from BIR
eServices website. Using the Offline eBIRForms package, taxpayers and Accredited Tax
Agents can directly encode data, validate, edit, save, delete, view, print and submit their
tax returns. The package can do automatic computations and has the capability to
validate encoded information. After filling out the forms, taxpayers can submit it through
the Online eBIRForms System.

What are the benefits of using the eBIRForms?

 Saves time because of automatic computations and auto-populated fields.
 Easy to use.
 Lessens human errors because of the validation feature.
 Available even to those without consistent internet connection.
 Captures taxpayer data.
 Lessens manual encoding

(Source: Guide for eBIRForms-www.bir.gov.ph)

The above packages contain forms for tax returns that are already revised into new
formats and can only be filled-up online.