How can we get lower taxes in the Philippines?

Lower tax rates for the Philippines
Lowering taxes for Filipino businesses is possible, but it will take a lot of compromise

Lowering taxes in the Philippines is possible, but it will take a lot of compromise for us to move things forward.

HOW CAN IT BE DONE?

There’s been several proposals of late aiming to lower the tax rates for the Philippines’ middle class. These include, among others, lessening the individual income tax rates, exemptions for start-ups, and one-time exemptions from the estate tax.  People are certainly having their fingers (and toes?) crossed as taxes here are universally acknowledged to be quite high.

Lowering the rates like tax exemption on all income below P240,000 (based on current proposal) would be a godsend.  Small businesses, meanwhile, need all the support to compete with the big boys, and a tax holiday can be that booster shot. And increasing the threshold for estate taxes would surely help certain families avoid having to borrow or worse be forced sell their ancestral home, just to pay the estate tax bill.  But as you lower income taxes on one end, the government needs to be certain that the total tax receipts will not decline significantly AND abruptly, that it negatively impacts delivery of basic social services. And this need to find immediate alternative sources to go along is where things get complicated.

IS TAX REFORM THE ANSWER?

The proposed tax reform package include revenue “raising” measures to offset the income tax reduction for the middle class. Like introducing a higher 35% (yes 35%) rate for any income exceeding P1,450,000 in the year 2018, elimination of VAT exemptions for seniors and PWDs, and raising VAT on petroleum products.  As expected, there is now considerable pushback to the notion of increasing VAT as this would hurt the poor. Because they’re more likely to save less and spend a greater portion of their income on consumption (and VAT).  So here we are now, stuck yet again. Some are now wondering if the promise of lower taxes is just that, an empty promise.

Many members of Congress (including some allied with the administration) are against raising the VAT, with some suggesting we should just tax the rich further. But think about this for a moment. The 2016 Forbes billionaires list has eleven Filipinos with a total wealth of $42.75 billion or approximately P2 trillion, and all that wealth, all of it, is not even enough to finance our government’s 2017 budget of P3.3 trillion. Suppose we seize all their wealth, what’s next and who’s next after we’ve spent all of it? Do we then target the next eleven richest families?

EFFICIENCY OF TAX COLLECTION

The obvious answer is we go after tax evaders.  But it would be foolish to expect President Duterte (or any administration) to be able to eradicate tax evasion within months or years.  With the millions of self-employed individuals and businesses, it may even take a generation to change this culture that one can get away without paying taxes.  We may have to consider introducing a fair tax amnesty plan to encourage people out of the shadows.  But this can’t be free pass and must go along with very tough penalties for dodging taxes going forward. Plus, a law that will prevent succeeding administrations from granting further tax amnesties as such would defeat the purpose.

Various self-proclaimed tax experts have a laundry list of suggestions, but one item that is absolutely necessary, however unpopular, is the need to expand the tax base. Expanding the tax base will likely include removing certain tax exemptions, and will impact certain industries and lower-income households.  But taxing the rich alone simply is not enough. The math doesn’t work at all.

So how do we get things done? How can we reduce taxes without putting a big hole in our government’s budget, a budget that for many is still not enough to address our country’s infrastructure needs and increasing welfare costs?  There’s only so much taxes the rich or anyone can stomach. No one would wish our business people to choose to invest elsewhere.

ROLE OF THE CURRENT ADMINISTRATION

Hopefully, the Duterte administration with its current favorable trust ratings can effectively explain to the public why expanding the tax base now, i.e. increases to VAT (but maybe a bit less than what is currently proposed) is the right long-term solution.

On the other hand, maybe they would have to scale down the proposed income tax cuts. I’m sure everyone would be happy with a lower income tax cut, rather than us being stuck and nothing happening.

This is no easy task.  Every sector and every business group wants a bigger slice of the “tax-cut” pie. Virtually no one wants a tax increase if it affects them.  We need to compromise for us to move things forward. We need this to finally implement sensible reforms that will finally grant much needed tax relief to our middle class in a manner that:

  • does not take away funding for our infrastructure backlog;
  • through tax cuts that are sustainable;
  • and will not impact our country’s fiscal health and credit rating.

Our country has gone from the “sick man of Asia” to one of the world’s fastest growing economies. We can surely make this work by coming together.

Yes we can!

Option O, or Option Ooh(Episode III)

Hi guys, please check out a couple of our earlier blogs/episodes to follow JCruz’s tax questions.

 

Our triathlon coach, JCruz, is now at a stage where he’s choosing between accepting BIR’s peace offering, the Optional Standard Deduction (OSD), or attempt to identify, segregate, and document all his receipts/expenses. His monthly revenue is P30,000, and below is summary of his monthly expenses, excluding those paid for/reimbursed by his clients.

Transo/gas/parking            2,500

Meeting costs/food             2,000

Equipment                            2,500

Miscellaneous                      2,000

Total                                      9,000

*rent “difference”               3,500

In our previous blog we mentioned most of JCruz’s bills, and the lease, are not under his name. Plus it’s not that simple to split, say, the gas bill between personal and business. Under BIR rules JCruz must track, segregate and secure proper receipts for every single peso for these bills to qualify as tax deductions…yes, every single expense. This is referred to as “Itemized Deduction”, or what I call Option Ooh, because that’s the reaction I get whenever I explain how it works. Or he may choose OSD (let’s call this Option O) and limit expenses at 40% of revenue, which in this case would be P12,000 (P30,000 x 40%). This P12,000 is a bit under JCruz’ initial list of P12,500 (P9,000 + 3,500), but if he selects Option O it is an automatic P12,000 deduction. Simple. No further info needed.

And there two other advantages. Unlike Option “Ooh”, there is no need to list down every single type of expense (just one line, that’s it). Secondly, under Option “O” or OSD,  there’s no need to file audited financial statements should your revenues exceed P150,000 in any given quarter. “Audited” means you need to hire/pay a separate CPA (other than your accountant, if you have one) to basically check your or the accountant’s numbers.

Of course OSD is not for all. For taxpayers under special tax rates they must report and itemize all expenses to the BIR. There are also businesses with very low margins (ex. a supermarket) where that would be a bad choice. But for many professionals and especially home-based solopreneurs, OSD could be a far easier and cheaper way to file income taxes.

 

 

BIR’s peace offering (Episode II)

Just like the Twilight series, please refer to earlier blog on business receipts and expenses Episode I.

 

Well we start Episode II again with our friend, triathlon coach JCruz, who’s eager to share his questions on business expenses. He has completed Step One and have identified all his “what-if” expenses, but has hit a roadblock. Turns out most of the utility bills are not under his name, his mobile postpaid plan, plus the lease agreement too. Within all these bills are his business expenses, but it can be a hassle to change all these agreements.

This is where Optional Standard Deduction (OSD) comes in. Ano yun? It’s the BIR saying for as long as an individual taxpayer is willing to limit business deductions to 40% of revenue/income, then the taxpayer need not keep the receipts/invoices for these deductions. What it really means is the BIR, in general, would ask no further questions (yey!) ONLY IF a taxpayer is not claiming just about any imaginable receipt out there, with a simple goal of paying little to no taxes. This is what I call a peace offering from the BIR (friends tayo ah) to anyone willing to claim only reasonable amounts of deductions. You see guys, the BIR can be reasonable, and this OSD option, this BIR peace offering, is one very effective way in simplifying the payment of income taxes.

So what are the other benefits of OSD (wait, there’s more?) Well, we might as well make this a trilogy. And our friend JCruz will be back for the finale.

Akin Na Lang Ang Resibo Mo! (Episode 1)

May sobrang resibo ka ba dyan? Has anyone heard of that? How about a friend who volunteers to get the bill and calculate everyone’s share, because your friend needs that receipt? This is especially true for home-based professionals and solopreneurs who apparently don’t have enough expenses/receipts to claim as tax deduction. Well, we don’t need to be a CPA to know what the BIR thinks about that.

But are expenses that low, that one has to resort to scrambling for receipts? Or maybe home-based businesses have been ignoring what I call the “what-if” expenses for tax deductions?

What-if expenses refer to those you have to separately pay for, assuming there’s a workplace away from home. If you do, think about the rent, utilities, internet, pantry & office supplies, separate computer, etc. Yes you “save” via luxury of working from home, but are you not already paying for these? If you’re not working from home, maybe a slower/cheaper broadband plan is good enough? How about the family printer that without it, you’d have to buy one yourself? Or is it possible you could settle for a smaller house (cheaper rent) if you don’t need the office room? All these extra costs are business expenses, too.

So how do we report these what-if expenses as tax deductions. There are two. First is to identify and calculate your what-if costs. For example, triathlon coach JCruz’s (Juan de la Cruz) family moved to a more expensive place near BGC, for him to be closer with potential clients. The “difference” as supposed to staying elsewhere is sort of JCruz’s office rent won’t you agree? There’s one business expense right there! The second step is to provide valid documentation. So the easiest way here is make sure the lease agreement (and monthly receipts) is under his name (but of course claim only the “difference” as tax deductions, NOT the entire rent).

But Step Two is not that simple as it can be a hassle to have to track and account for all expenses. Good news is there’s an easier alternative, the Optional Standard Deduction (OSD), which we’ll cover in our next blog.

 

Stay tuned !

 

Income tax rate of just 1%?

The Department of Finance has just released more info on proposed tax reform proposals it aims to be approved next year, and yes it includes much lower income tax rates. How much lower? How about as low as 1%? Have I got your attention?

But just who are qualified under this low income tax rate? Let’s assume JCRuz (aka Juan de la Cruz) is a starting triathlon coach who makes P30,000/month and as part of his work, racks up expenses of P9,000/month. JCruz is also single and currently dating his childhood crush. Under the current tax rules, the income tax for the year would be:

Annual income
30,000 x 12                                          360,000

Less allowed deductions:
Business expenses – 9,000 x 12       108,000
Personal tax exemption                      50,000
Dating childhood crush                                  x  sorry, hindi pwede
Taxable income                                  202,000

Tax due (current rules)                       38,000

 

Under the proposed lower income tax rates, those earning P250,000 and below will be taxed a fixed P2,500, and 20% on the next P150,000 of income over P250,000.  So JCruz could see his P38,000 tax sliced to just:

Annual income                                   360,000

Less allowed deductions:
Business expenses                              108,000
Personal tax exemption                                  x  let’s assume this could go away
Taxable income                                  252,000

Tax due                                                     2,900

The lower rates should encourage more people to register and file their taxes and could lead to higher total tax collections to improve our country’s infrastructure and public services.

Isn’t this more awesome that catching that rare Pokémon?

Before You Start a Business, Focus on the Most Important Thing

Important advice for aspiring Filipino entrepreneurs

I’ve been approached by numerous solopreneurs and home-based businesses for advice on how to sort out their bookkeeping.

The three most common hiccups are:

  • mixing personal and business-related funds;
  • having trouble segregating or splitting personal and business expenditures; and
  • ultimately, not having a clear picture of how much profit they’re truly making.

A younger me would have immediately put the accountant hat on, and fire off a number of tips and best practices, most simple would be maintaining a separate bank account exclusively for business and listing down all their regular expenses and identify those related to their business and pay those bills through that separate bank account.

But when someone approach me nowadays, the first thing I’ll do is congratulate them.

It’s takes a great deal of creativity, passion and courage for someone to put their dreams into action and leave their comfort zone (e.g. a stable corporate career.) That is awesome!

And the thing is, when you’re getting to point of being overwhelmed with the paper works, it’s highly likely that your business/vision has taken off.

It may still be at a low altitude, but you’ve gone through the first hurdle. So I always say: “You’re now having to deal with bookkeeping and taxes, which means you’ve made it.” (It’s sort of a good problem to have, one way of looking at it.)

What’s the point?

For aspiring entrepreneurs, my view is just make sure that your idea is groundbreaking/innovative/and revolutionary, and that you deliver the best product and service. The rest will be secondary.

Say you’re into baking. Competition might be stiff, but if you focus first on perfecting those irresistible pastries and creating that eye-catching brand/marketing. When your creation becomes a hit, I suppose it’s not too late to then shift your lenses onto your costs and expenses and look for cheaper suppliers for your ingredients? Yes, that stack of receipts and bills surely have to be taken care of, but when one’s business takes flight, the rest will be easy.

Do you want us to help you with business registration?

We’re trying out a new business registration service and you may qualify to be one of our pilot registrants! Details here:

Business Registration for Sole Prop, Freelancers, and Professionals

OFWs Don’t Pay Income Taxes. Shouldn’t Online Filipino Freelancers Be Exempted, Too?

Online Filipino Freelancers Exempted from Income Tax
Should Filipino freelancers pay income tax?

Without divulging my age, let’s just say I was once a patron of prepaid internet ISP cards during the dark ages where people back then would have freaked out if someone had showed them the IPhone. Anyone remember anticipating that fax sound to end so we could finally start surfing, only to have your sibling pick up the phone extension in the other room? Oh that was so annoying…

But technology and the internet has come a long way. It has even disrupted the very employment landscape and allowed Filipinos to compete for virtually any job in the world, right at the comfort of home. Graphic design, bookkeeping, virtual assistants – the list is endless, and out of this technological revolution an ever growing community of online freelancers has emerged. Some describe online freelancing to be a bit similar to working abroad, only this time you get to do it even in pajamas.

It therefore is not surprising for some online freelancers to think they enjoy the same “tax exempt” status as OFWs, and if not, why not? Why not us too?

Continue reading “OFWs Don’t Pay Income Taxes. Shouldn’t Online Filipino Freelancers Be Exempted, Too?”

A little bit of this and a little bit of VAT

The nature and characteristic of Value Added Tax (VAT) is that it is a “business tax levied on the value added on certain goods, properties and services in the domestic market and/or importer of goods”

The case of Tolentino v. Secretary of Finance shows the nature of Value Added Tax. In this case, what was assailed was the constitutionality of the Value Added Tax law on the ground that it was contrary to the progressive tax system as mandated in the Constitution.

VAT was regressive in character due to the fact that it is an indirect manner of taxation. The Supreme Court answered this by saying that in the power of congress is plenary, it is not limited to choose which form of taxation to undertake. The directive to undertake a progressive tax system is merely a directive.

What is Value Added Tax?

The first instance of VAT can be found in Presidential Decree No. 1158, Section 99. This lead to the second instance of VAT in the tax code reform of 1986. The promulgation of Executive Order No. 273 formally brought about the VAT into the national internal revenue code.

While VAT in itself has remained fairly constant throughout the years, the manner in which VAT refunds have been acquired has all but been static. To understand the nature of VAT, a little explanation is required. VAT, being an indirect tax, is a tax which is passed on the buyer from the seller.

As stated in Section 105 of the National Internal Revenue Code (NIRC), Value Added Tax is an indirect tax. By being an indirect tax, the amount may be passed on or shifted to the customer.

Under the VAT system, one acquires Input tax and Output tax. Input tax is the VAT paid by a person or entity in a transaction which is subject to VAT. Output tax is the tax shifted to the purchaser in a transaction subject to VAT. Since VAT is an indirect tax, there is a system allowed to redeem excess paid VAT. A VAT-registered entity may use his Input tax to offset his Output tax as allowed in the NIRC provided that his Input is greater than his Output.

Types of Value Added Tax Transactions

VAT has three types of transactions: those that are subject to VAT, those, which are exempt from VAT, and those, which are considered VAT, zero-rated. Under the current law, the persons liable for VAT are found under Section 105 of the NIRC.  The biggest difference between VAT exempt transactions and VAT zero-rated is the fact that VAT zero-rated allows the taxpayer to claim input tax thus there is total relief to the taxpayer as opposed to VAT exempt transactions where any Input tax cannot be claimed by the taxpayer because the transaction is VAT exempt.

To illustrate:

If A sells to B an item for 100 pesos in a VAT taxable transaction with 12% VAT total selling price is 112 pesos.  B subsequently sells the item to C for 150 pesos with 12% VAT. Total selling price is 168 pesos.

In this scenario B paid A’s VAT worth 12 pesos however he was able to pass the VAT to C worth 18 pesos thus he was able to recover the VAT he paid. B’s Input was 12 and his Output was 18. His Output tax is greater by 6 pesos than his Input tax. He is not entitled to a refund for excess payment.

If A sells to B an item for 100 pesos in a VAT taxable transaction with 12% VAT total selling price is 112 pesos.  B subsequently sells the item to C for 150 pesos in a VAT exempt transaction. Total selling price is 150

In this scenario B paid A’s VAT worth 12 pesos however because the subsequent transaction was VAT exempt B could not pass on the VAT he paid. He will have to deduct the VAT paid as a cost.

If A sells to B an item for 100 pesos in a VAT taxable transaction with 12% VAT total selling price is 112 pesos.  B subsequently sells the item to C for 150 pesos in a VAT zero-rated transaction. Total selling price is 150 pesos.

In this scenario, B paid A’s VAT worth 12 pesos. However, the subsequent transaction was VAT zero-rated thus, he was not able to pass the VAT he paid. Since the transaction was VAT zero-rated he can claim the Input tax that he paid which is 12 pesos since his Output tax was 0 and subsequently apply for a refund.

Not knowing this, a layman might argue that the best transaction would be Value Added Tax exempt. Such a misconception would be gravely erroneous and could lead to economic losses.

Thus, when choosing between VATable or VAT exempt or VAT zero-rated transactions, it is always important to determine the nature of the business and any of its transactions. Properly tracking VAT related transactions might allow a taxpayer to discover that he is entitled to VAT refunds or that he might be able to mitigate the payment of any VAT due.

Should my business pay VAT? A guide for Filipino small business owners

Should-my-business-pay-VAT
Should my business pay VAT?

Is your business VAT registered? Maybe it’s time to change that. 

There’s been this clamor for years to have the income tax table indexed to inflation. The last time it happened? Never. It was never adjusted for inflation since the revised tax code took effect more than 20 years ago. But finally, people’s spirits have been lifted, with President Duterte mentioning lower income tax rates to come in his first SONA.

Speaking of inflation, there is one item that currently IS indexed to inflation, and has a huge impact not just on the taxes to be paid but also on the complexity of the accounting required: the annual revenue threshold that determines if one has to pay the 3% percentage tax, or the 12% VAT.

Most VAT taxpayers are not aware this threshold is adjusted (upwards) regularly. What would be a P1,500,000 annual threshold back in 2006 is now at P1,919,500, so some VAT taxpayers may now fall below this threshold and can slide down.

[EDIT: RA 10963 or the Tax Reform for Acceleration and Inclusion has increased the VAT threshold to P3,000,000.]

But what about the ability to apply input VAT and offset against output VAT? Is there a similar mechanism under percentage tax? The answer is no. But for most businesses and self-employed professionals, 3% would certainly be better, since the only scenario where VAT system would be preferred is when:

a) The margin in the business is really low.

b) The taxpayer has VAT invoices/receipts for ALL expenses.

Let’s put these into numbers. Say VAT taxpayer has an annual revenue of P1.5 million (excluding VAT) and P1.0 million in expenses (excluding VAT). The output VAT would be: P180,000 (P1.5M x 12%) and input VAT would be P120,000 (P1.0M x 12%) bringing NET VAT to P60,000.

But according to the BIR gov ph’s percentage tax rule. it’s a simple and lower P45,000 (P1.5M x 3%). A P15,000 difference! And that assumes all expenses were paid to VAT-registered suppliers/establishments, which is rarely the case. So if only P800k of expenses are from VAT suppliers, and input VAT is P96,000, and you’re looking a tax bill of P84,000 (P180,000 less P96,000).

And don’t get me started with all the bookkeeping stuff that goes away when one moves away from VAT. Because VAT taxpayers know what I’m referring to.

So what say you? Are you VAT-registered and perhaps now below the threshold? Say hello to percentage tax?

If you’ve decided to move away from VAT, here’s a guide on how to change your tax type to non-VAT: Tax Reform: Changing from VAT to Non-VAT

Looking for a better and more convenient way to file and pay for your small business’s taxes?