IN last week’s article, we discussed Revenue Regulations (RR) No. 8-2018, implementing the income tax provisions of Republic Act (RA) No. 10963, or the “Tax Reform for Acceleration and Inclusion” (TRAIN) Law, specifically, the new income tax rates for individual citizens, resident aliens, and non-residential aliens, among others.

In particular, our discussion focused on the provisions of RR No. 8-2018 relating to an option for individual taxpayers to avail of an 8 percent tax on gross sales or receipts. To reiterate, individuals earning income purely from self-employment and/ or practice of profession whose gross sales/receipts do not exceeed the value-added tax (VAT) threshold (which is currenlty now at P3 million), shall have the option to avail of:

The new graduated income tax rates; OR

An 8 percent tax on gross sales or receipts in excess of P250,000 in lieu of the graduated income tax rates and the percentage tax under Section 116 of the Tax Code, as amended,.

Given the criteria provided above, what would be the effet if a taxpayer, having signified his intention to be taxed under the 8 percent income tax rate in his 1st Quarter Income Tax Return, has in fact breached the P3 million VAT threshold for his gross sales/ receipts for the taxable year?

According to the regulations, a taxpayer shall automatically be subject to the graduated rates even if the 8 percent income tax rate option is initially selected,when gross sales/receipts and other non-operating income exceed the

VAT threshold during the taxable year. If this happens, the taxpyaer’s income tax shall be computed under the new graduated income tax rates, and he will be allowed to a tax credit for the previousw quarter income tax payments made under the 8 percent income tax rate option.

To illustrate, let us assume that Mr. A, a self-employed individual, signified his intetion to be taxed under the 8 percent income tax rate in his 1st Quarter Income Tax Return. He did not wexpect his business to pick-up, and was surprised to learn that his total sales for the first 3 quarters already amounted to P3 million, with sales for the 4th quarter amounting P3.5 million. Assuming his cost of sales (COS) and operating expenses (OE) for the year are P3 million and P1.44 million, respectively how will we computer for Mr. A’s income tax for the year? Mr. A’s tax due shall be computed as follows:

Total Sales P6,500,000
Less: COS 3,000,000
Gross Income 3,500,000
Less: OE 1,440,000
Taxable income P2,060,000

Given Mr. A’s taxable income of P2.06 million, his income tax due, using the graduated income tax rates, amount to P509,200. However, considering that Mr. A was under the 8 percent income tax rate option for the first 3 quarters, for which he had paid the corresponding tax, a tax credit of P220,000, shall be applied against his income tax due of P509,200, resulting to an income tax payable of P289,200 for the taxable year.

Considering that Mr. A’s gross sales for the year has breached the VAT threshold of P3 million, he shall likewise be liable for VAT. For thsi purpose, Mr. A is requied to update his BIR registration from a non-VAT taxpayer to a VAT taxpayer. In addition, he shall also be subject to percentage tax under Section 116 of the Tax Code, which shall be imposed from the beginning of the year until the time Mr. A is liable for VAT.

Manila Times Source

ATTY. PEACHES ARANAS

Managing Partner LMA LAW