What is TRAIN BILL for Professionals?

Over a year into President Rodrigo Duterte’s administration, the plans for Dutertenomics’ Build, Build, Build infrastructure program has finally commenced. The socioeconomic agenda, which features a promising vision of yielding robust growth across the Philippines, however, needs appropriate funds in order to be successful. To address this, President Duterte has signed into law the Tax Reform for Acceleration and Inclusion (TRAIN) bill, which is visualized to generate P130 million in revenues.

TRAIN Bill for ProfessionalsSet to be implemented this January 2018, the TRAIN bill envisions to progress the country’s current low middle-income status to upper-middle-income status. It seeks to correct a number of deficiencies in the tax system to make it simpler, fairer, and more efficient—according to Department of Finance (DOF).

Included in this agenda is the provision of equal opportunities for every Filipino, which covers lesser burden on tax for Self Employed and Professionals.

Tax Reform for Acceleration and Inclusion (TRAIN) for Self-Employed and Professionals (SEP) The old tax code does not favor the self-employed and professionals. As contributors to our economy, SEPs—particularly small business owners, are rightly entitled to be given a boost and put in the heart of our economy. To make this change possible, TRAIN introduces an optional flat tax or a single rate of income tax to aid SEPs.

In the previous tax code, SEPs pay income tax at the same five to thirty-percent income tax schedule. However, with the new program, those with gross sales or gross receipts that do not go over the new value-added tax (VAT) threshold of ₱3,000,000 have the option to either use,
(a) the new Personal Income tax schedule shown below, or (b) an eight percent flat tax on gross sales or receipts exceeding ₱250,000. In choosing the eight percent flat tax, they will be exempt from the three percent percentage tax. Regardless of their choice, SEPs whose gross sales or receipts do not exceed ₱500,000 will be exempt from the three percentage tax.

Personal Income Tax Schedule
(Under TRAIN bill)
Annual Salary
Tax Schedule (2018-2022)
Tax Schedule
(2023 onwards)
Not over P250,000
Exempted
Exempted
Over P250,000 but not over P400,000
20% of the excess over P250,000
15% of the excess over P250,000
Over P400,000 but not over P800,000
P22,500 + 20% of the excess
over P400,000
Over P800,000 but not over P2 million
P130,000 + 30% of the excess
over P800,000
P102,500 + 25% of the excess
over P800,000
Over P2 million but not over P8 million
P490,000 + 32% of the excess
over P2 million
P402,500 + 30% of the excess
over P2 million
Over P8 million
P2,410,000 million + 35% of the
excess over P8 million
P2,202,500 + 35% of the excess
over P8 million

Common Issues/Scenarios:

Scenario 1

Based on the previous year sales/receipts, a purely self-employed VAT registered individual/professional expects to earn Php 2.5 million as gross sales in 2018 – below the new VAT threshold of Php 3 million.

Issue # 1: Do I continue to be a VAT registered?

Opinion: Yes. If you want to be Non-VAT registered, then there is a need to change your registration with the BIR. As per the BIR advisory, purely self-employed VAT registered individuals/professionals have until March 31, 2018 to change their VAT status to Non-VAT.

Issue # 2: If I change my VAT status to Non-VAT, do I need to change my OR/Invoice to Non-VAT?

Opinion: I think you would have to surrender all your unused OR/Invoice to the BIR and apply for printing of a new set of OR/Invoice as Non-VAT person.

Issue # 3: If I continue to be VAT registered and be exempt from VAT, should I issue a VAT-Exempt OR?

Opinion: Yes. As per TRAIN law, gross sales/receipts of Php 3 million and below are exempted from VAT. However, you would have to issue a VAT-Exempt OR to your customers/clients. As such you still need to file VAT Declarations/Returns (2250M/Q) monthly. It is my opinion that failure to issue a VAT-Exempt OR will make you liable to pay VAT.

Issue # 4: If I continue to be VAT registered and be exempt from VAT, can I claim my input taxes tax credit?

Opinion: It is in my opinion that you will not be able to claim your input VAT from your purchases if you issue a VAT-Exempt OR for your sales. As a VAT registered person, you may, however, claim it as part of your expense, but not input tax credit.

Issue # 5: If I continue to be VAT registered and be exempt from VAT, will I be liable to pay 3% other percentage tax?

Opinion: Section 38 of the TRAIN law amends Section 116 of NIRC. It says “Any person whose sales or receipts are exempt under Section 109 (BB) of this Code from payment of Value added tax AND who is not VAT registered shall pay 3% of his gross quarterly receipts/sales”.
The operative word is “and”. Since you are exempt under Section 109 (BB) and is VAT registered, then by deduction, you are NOT liable to pay the 3% other percentage tax.

Issue # 6: If at the end of the year my total gross receipt exceeds the Php 3 million thresholds, should I pay VAT?

Opinion: Yes. You may amend all your VAT declarations/returns. However, the problem with this method is that you might be charged with penalties (surcharge and interest) for incorrect filing.

In my opinion, to avoid penalties, you may pay your VAT using Form 0605.

References:
www.dof.gov.ph
www.build.gov.ph
www.bir.gov.ph

Disclaimer: New and subsequent BIR rulings, issuances and/or laws may render the whole or part of the article obsolete or inaccurate. For more information, please inquire or consult with the BIR.