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IN THEORIN

Duria, Glyde Vince Isidore L. BSA - 5 THEORIN

Position Paper
 COVID 19 Effects on Tax Collection of Restaurant
Industry

Introduction

The economic and social costs of a pandemic are based on the effects of

past pandemics. However, this time, past pandemics do not really apply or help

guide us, as this is the first modern-day pandemic and our economy is

globalized.

Like every industry, the restaurant industry is deeply hit and saw a

sudden collapse. Restaurants are an industry where Filipinos spend more than

half their annual food budget, and they are out of action right now. Since

circumstances are changing by the day, no one can know where the COVID-19

pandemic is going and it is very difficult to project the duration of the

pandemic. As a result, the entire restaurant industry and supply chain is

reeling.

Revenue data from customer management software company Womply,

which tracks revenue from 48,000 restaurants, shows restaurant revenue

significantly lower than last year’s numbers. As early as March 12, the day that

President Rodrigo Duterte announced first a Covid-19 lockdown of Manila then

a lockdown of the entire Luzon Island – Philippines largest island, housing over

50% of the population and most significant economically, and some provinces

of the country, revenue was already down 25 percent. The sudden drop of sales
Duria, Glyde Vince Isidore L. BSA - 5 THEORIN
Position Paper
revenue of the industry due to COVID – 19 is causing the restaurants to

struggle for its tax compliance.

What is Taxation?

Taxation, as defined in the general principles of taxation, is the inherent

power of the sovereign, exercised through the legislature, to impose burdens

upon subjects and objects within its jurisdiction for the purpose of raising

revenues to carry out the legitimate objects of government. The power of

taxation is an inherent and plenary prerogative of the State primarily exercised

by the Legislative Department. However, Local Government Units (LGUs) are

now allowed to create their own source of revenue (Article X, Section 5).

SEC. 31 Taxable Income Defined

The term ‘taxable income’ means the pertinent items of gross income

specified in the Philippine Tax Code, less deductions, if any, authorized for

such types of income by this Code or other special laws.

Regular Income Tax Rate

Rates of Tax on Taxable Income of Individuals and Self-Employed

Individuals – The tax shall be computed in accordance with and at the rates

Duria, Glyde Vince Isidore L. BSA - 5 THEORIN

Position Paper
established in the following schedule. Tax Schedule Effective January 1, 2018

until December 31, 2022.

Not over P250,000 0%

Over P250,000 but not over P400,000 20% of the excess over P250,000
Over P400,000 but not over P800,000 P30,000 + 25% of the excess over

P400,000
Over P800,000 but not over P130,000 + 30% of the excess of

P2,000,000 P800,000
Over P2,000,000 but not over P490,000 + 32% of the excess of

P8,000,000 P2,000,000
Over P8,000,000 P2,410,000 + 35% of the excess over

P8,OOO,OOO

Rates of Income Tax on Domestic Corporations. In General – Except as

otherwise provided in the Philippine Tax Code, an income tax of thirty-five

percent (35%) is hereby imposed upon the taxable income derived during each

taxable year from all sources within and without the Philippines by every

corporation.

Itemized Deduction

An Itemized Deduction is an expenditure on eligible products, services,

or contributions that can be subtracted from the gross income to reduce the
Duria, Glyde Vince Isidore L. BSA - 5 THEORIN
Position Paper
tax bill. The allowed deductions from the gross income under the Philippine

Tax Code are the following: Expenses, Interest, Taxes, Losses, Bad Debts,

Depreciation, Depletion of Oil and Gas Wells and Mines, Charitable and Other

Contributions, Research and Development, Pension Trusts, Additional

Requirements for Deductibility of Certain Payments, Premium Payments on

Health and/or Hospitalization Insurance of an Individual Taxpayer. Itemized

deductions allow certain taxpayers to lower their annual income tax bill beyond

what they would receive from standard deduction.

Optional Standard Deduction

In lieu of the itemized deduction allowed, an individual subject to tax

under Section 24, other than a non-resident alien, may elect a standard

deduction in an amount not exceeding forty percent (40%) of his gross sales or

gross receipts, as the case may be. In the case of corporation subject to tax, it

may elect a standard deduction in an amount not exceeding forty percent (40%)

of its gross income as defined in the Code.

The Industry

It’s still difficult to imagine a post-COVID world, as the entire planet is

still battling the pandemic. The future looks bleak and industries might
Duria, Glyde Vince Isidore L. BSA - 5 THEORIN
Position Paper
crumble particularly food and beverage. Although some continue to operate via

delivery and takeouts, majority of the micro, small, and medium enterprises

(MSMEs) are finding it difficult to compete with household names and big

restaurant groups. Admittedly, even reputable companies struggle to adjust to

a wildly different dining scenario.

Prior to this, the restaurant industry was growing at a rapid rate and was

estimated to have amassed more than PHP 600 billion in revenues in 2019

alone. But with the pandemic that has forced many to shut their doors, it's safe

to assume that we will see a far greater dip in revenues this year.

The first hurdle that most owners, if not all, faced when the Enhanced

Community Quarantine (ECQ) had started is how to sustain the livelihood of

their employees. Estimates of over half a million employees in the F&B sector

are now greatly affected and receive no income. Although a subsidy program

was rolled out by Department of Finance to support income-less workers

during ECQ, a huge number of restaurants are yet to receive their share of the

promised subsidy as the Department of Labor and Employment admits that the

fund is rapidly depleting.

Tax Collection

In a normal course of business, restaurants owners use the regular

income tax rate to compute their tax dues to the government but because of

Duria, Glyde Vince Isidore L. BSA - 5 THEORIN

Position Paper
COVID-19 the revenue streams of the industry has plummeted, some are

unable to catch up with its operational cost thus resulting to a loss. Despite

having small profit the restaurant industry still has to pay their tax dues. The

owners may choose the optional standard deduction of forty percent (40%)

deduction on gross receipt or revenue in lieu of itemized deduction. The owner

may opt to the two methods on where tax computation is smaller. For example:

Income Tax Computation (Regular Itemized Optional Standard

Income Tax) Deduction Deduction (40%)

Gross Sales/Receipts 2,500,000 2,500,000
Less: Allowable Deductions (Itemized -900,000 -1,000,000

or OSD) (2,500,000 x 40%)

Net Taxable Income 1,600,000 1,500,000
Gross Sales/Receipts 2,500,000
Allowable Deductions (expenses) (900,000)
Taxable Income 1,600,000

Using the graduated tax Optional Standard

Itemized Deduction
table, tax due is: Deduction
On the first 800,000 130,000 130,000
On the excess over 240,000 210,000

800,000 (XX x 30%) (800,000 x 30%) (700,000 x 30%)

Tax due 370,000 340,000

The Government has its initiatives for the distraught businesses, under

Republic Act (RA) No. 11494, referred to as the “Bayanihan II Act” (An Act
Duria, Glyde Vince Isidore L. BSA - 5 THEORIN
Position Paper
Providing For Covid-19 Response And Recovery Interventions And Providing

Mechanisms To Accelerate The Recovery And Bolster The Resiliency Of The

Philippine Economy, Providing Funds Therefor, And For Other Purposes) took

effect on 14 September 2020. Number six (6), Allowing the net operating loss of

the business or enterprise for taxable years 2020 and 2021 to be carried over

as a deduction from gross income for the next five (5) consecutive taxable years

immediately following the year of such loss.

Conclusion:

There are number of restaurants in other country getting creative when it

comes to making up for lost revenue like adding Covid-19 surcharge but

customers perceive this as taxing or burden, raising price on the menu is

better than adding surcharge.

At this point restaurant are finding ways to raise their revenue, lessen

their operating cost, borrowing money or even asking aid to the government

just to continue their operation and avoid shutting down.

Duria, Glyde Vince Isidore L. BSA - 5 THEORIN

Position Paper
 Restaurant’s owners can make a way to lessen their tax by choosing

between itemized deduction and optional standard deduction, which method

can benefit them the most. If the restaurant suffers loss the government

permits them to carry the loss over as a deduction from gross income for the

next five (5) consecutive taxable years immediately following the year of such

loss.

Covid-19 has indeed impacted the tax collection from the restaurant

industry, low sales means low tax collected.

References:

Philippines: Tax developments in response to COVID-19:

https://home.kpmg/xx/en/home/insights/2020/04/philippines-tax-
developments-in-response-to-covid-19.html

The Future Of Restaurants In The Philippines And How F&B Industry Can
Bounce Back: https://ph.asiatatler.com/dining/the-future-of-restaurants-in-
the-philippines-how-fb-industry-can-bounce-back

https://www.yorkdispatch.com/story/news/2020/07/29/sales-tax-data-
restaurants-bars-battered-covid-19-rules/5521398002/

https://www.accountingtoday.com/opinion/the-hidden-tax-implications-of-
covid-19-surcharges

Duria, Glyde Vince Isidore L. BSA - 5 THEORIN

Position Paper
http://news.cchgroup.com/2020/04/16/special-report-how-covid-19-is-
changing-business-sales-tax-obligations-and-enhancing-risk-5/featured-
articles/
https://www.cohnreznick.com/insights/legislation-tax-provisions-that-can-
help-restaurants-cope-with-covid-19

Duria, Glyde Vince Isidore L. BSA - 5 THEORIN

Position Paper