First comes the Christmas Season, then comes the New Year Season. And then there’s the tax season. Celebration, celebration, and then suddenly, obligation. Unlike the first two jovial seasons, tax season can be quite stressful.
Even with prior research, the complex tax system ensures at least some confusion on the part of the taxpayer. What brings in the stress, however, is that failure to comply--whether intentionally or not--can result in exorbitant penalties.
The three groups of taxes to always keep in mind are income tax, business taxes, and withholding taxes. There are other types of taxes such as donor’s tax, capital gains tax, or estate tax, but they are not always relevant.
By keeping these three in mind, taxpayers can breathe easier and do their tax compliance right.
The first and most famous type of tax is the income tax. Whether you’re an employee, a business owner, or a practicing professional, you have to pay income tax.
Self-Employed and Professionals have the option to avail the graduated income tax or the new eight percent income tax rate. The graduated income tax can range from 20 percent to 35 percent and they can avail of deductions. On the other hand, the eight percent income tax rate is exactly what its name states. While it may seem significantly lower, keep in mind that those availing the eight percent rate cannot avail of deductions.
No matter what type of income tax is availed, the deadlines remain the same for all individuals. Income tax returns need to be filed both quarterly and annually. All in all, you only have to file four income tax returns every year--three quarterly, and one annually.
Even if you are exempt from paying income tax, such as Barangay Micro Business Enterprises, you are still required to file returns.
As business owners, you have to choose from two types of business taxes: Value-Added Tax (VAT) and Percentage Tax. Of course, sometimes you won’t have a choice at all. If your gross sales exceed Php3 million annually, you are required to pay VAT. It may also depend on the nature of your business. Importers, for instance, are required to be VAT-registered taxpayers regardless of their gross sales.
Value-Added Tax is a 12-percent rate imposed on the sales of goods or services, while Percentage Tax is a three-percent tax imposed on gross quarterly sales or receipts.
Earning below the P3 million threshold will not require you to pay the three percent Percentage Tax. You will have the option to avail of either VAT or Percentage Tax. Or, you could take the third option and avail of the earlier-mentioned eight percent income tax, which will exempt you from both.
Compliance-wise, VAT tends to be more complicated. VAT-registered taxpayers have to file monthly declarations and quarterly returns, whereas Percentage Tax taxpayers only need to file quarterly returns.
If you are a VAT-registered taxpayer, you will have to file a total of sixteen documents to the BIR: twelve monthly declarations and four quarterly returns. If you are not, you only have to file four quarterly Percentage Tax returns.
Individuals can easily refer to this flowchart:
There are three main withholding taxes: withholding tax on compensation, creditable withholding tax, and final withholding tax.
The withholding tax on compensation is, to put it simply, the employee version of the income tax. This tax is withheld by the employer and will need to be remitted to the BIR.
Creditable withholding tax is imposed on specific income payments. These include payments to lawyers, CPAs, and doctors, among many others. It is often easier to check the extensive list provided by the BIR to ensure whether you are covered by the creditable withholding tax.
Final withholding tax is imposed on passive income such as royalties, prizes, interest income and others.
Withholding taxes have to be taken care of by the payor. In other words, the main reason you will file withholding tax returns is if you pay for services or goods subject to withholding tax. Of course, this means that, if you have employees, you are required to remit the withholding tax as well.
You only need to file these returns if you have taxes to remit, so these are not quite as regularly-submitted as income tax, VAT, or percentage tax returns.
Keep in mind that these are just the basic taxes. You may have to pay more specific to your line of business--or even be exempt!
These taxes are most often audited by the Bureau of Internal Revenue (BIR) (especially VAT which has its own audit procedures) and complying properly with these can save you millions from avoided penalties. For those still confused, the BIR has recently begun enabling more ways to automate and simplify tax compliance. Its recent initiative, the Electronic Tax Software Providers Certification (eTSPCert) System, will allow the development of third-party tax compliance software. These applications, such as the TaxWhizPH mobile app, will make use of innovative features to improve the taxpayer experience especially for Self-Employed and Professionals.
In addition to allowing the electronic filing of returns, the TaxWhizPH mobile app will also be able to automatically generate returns and capture pertinent data from pictures of receipts. Subscription to the TaxWhizPH mobile app is currently free at app.acg.ph.
Mon Abrea is the co-chair of the Ease of Doing Business (EODB) Task Force on Paying Taxes, the founding chairman of the Asian Consulting Group (ACG) – the Philippines’ first Tax Hub for SMEs in the Asia-Pacific – and the founding president of the Center for Strategic Reforms of the Philippines, Inc. (CSR Philippines) – the official Think Tank of the Bureau of Internal Revenue (BIR) and the Department of Trade and Industry (DTI) on the ease of doing business. He has been recognized as one of the Outstanding Young Persons of the World, Ten Outstanding Young Men of the Philippines (TOYM), and a Distinguished Bedan in the field of Accounting & Taxation. Follow him on social media at @askthetaxwhiz