Income and

Business
Taxation Part 3
Quarter 2, Week 5
 Tax Reform for Acceleration and
Inclusion (TRAIN) Act

Tax Reform for Acceleration and

Inclusion (TRAIN) Act, officially cited
as Republic Act No. 10963, is the initial
package of the Comprehensive Tax
Reform Program (CTRP) signed into
law by President Rodrigo Duterte on
December 19, 2017.
Tax Reform for Acceleration and Inclusion (TRAIN) Act

TRAIN consists of revisions to the National Internal Revenue

Code of 1997, or the Tax Code.
This reform includes packages that make changes in taxation
concerning the:
▪ Personal Income Tax (PIT),
▪ Estate Tax,
▪ Donor’s Tax,
▪ Value Added Tax (VAT),
▪ Documentary Stamp Tax (DST) and
▪ Excise Tax of petroleum products, automobiles, sweetened
beverages, cosmetic procedures, coal, mining and tobacco.
 BUSINESS TAX
-is the tax imposed on the right or privilege to
engage in an onerous transfer of goods or
services in the normal conduct of business.

-Transfers arising from the conduct of

business will give rise to both business tax
and income tax.
Business Income
The tax payments of a business organized as a
sole proprietorship are made in the name of its
owner.

The owner is considered an individual taxpayer

who derived income from business. He is required
to file BIR Form 1701.
Businesses may settle their income tax
liabilities and submit their income tax returns
(tax form) to the government three months and
fifteen days from the close of the year.

For a business that follows a calendar year,

the date of settlement is April 15.
▪The prominent feature of the tax reform is that
people who earn ₱250,000 annually or ₱21,000
monthly and below are exempted from paying
Personal Income Tax (PIT).

▪This includes minimum wage earners, who were

also exempted in the former tax system.

▪On the other hand, those earning over ₱250,000

have tax rates following a set PIT schedule.
➢Essentially, greater income is taxed at
higher tax rates.

➢This denotes that low to middle income-

earners get to have a higher take home pay,
while high income-earners have a bigger
contribution to tax revenues.

➢Increase in consumption taxes intend to

counterbalance PIT tax exemptions.
Income Tax
"The TRAIN lowers the Personal Income Tax (PIT) for all taxpayers except the rich”. Effectively,
personal taxes will be reduced for 99% of the Philippine taxpayers.
The new PIT is summarized in the table below:
Annual Income Tax Tax Rate Percent of Taxpayers
₱0-250,000 0% 83%
20% of the excess over
Over ₱250,000-400,000 8%
₱250,000
₱30,000 + 25% of the
Over ₱400,000-800,000 6%
excess over ₱400,000
₱130,000 + 30% of the
Over ₱800,000-2,000,000 2%
excess over ₱800,000
Over ₱2,000,000- ₱490,000 + 32% of the
1%
8,000,000 excess over ₱2,000,000
₱2,410,000 + 35% of the
Over ₱8,000,000 0.1%
excess over ₱8,000,000
 The Law also ensures a
Additionally, minimum wage earner who
minimum-wage incurs a small raise will not have
earners are still his overall salary (with the PIT
deducted) less than minimum
exempted from PIT. wage.

Finally, Self-employed and Also, married couples where both

professionals with gross parties are working may be
exempted up to a total of ₱500,000.
sales below VAT can only This does not include the exemption
pay 8% flat tax instead of from the first ₱90,000 of their
their income and personal thirteenth month pay and
tax.[5] additional bonuses.
 3 types of individual taxpayers:

1.Purely from compensation

2.Self-employed and professionals
3.Mixed income earners
 Tax Rules for Self-Employed and Professionals
(UPDATE May 2018):
▪ The BIR has released a new Revenue Memorandum Order covering
the availment of 8% tax rate for self-employed and professionals.
▪ Here are relevant items on taxation of Self-Employed and
Professionals from BIR’s RR 8-2018:

“Individuals earning income purely from self-employment and/or

practice of profession whose gross sales/receipts and other non-
operating income does not exceed the value-added tax (VAT)
threshold (₱3,000,000) as provided under Section 109 (BB) of the Tax
Code, as amended, shall have the option to avail of:
a. The graduated rates under Section 24(A)(2)(a)
of the Tax Code, as amended; OR

b. An eight percent (8%) tax on gross sales or

receipts and other non-operating income in
excess of two hundred fifty thousand pesos
(₱250,000.00) in lieu of the graduated income
tax rates under Section 24(A) and the
percentage tax under Section 1 16 all under
the Tax Code, as amended.
Taxable income for individuals earning income
from self-employment/practice of profession shall
be the net income, if taxpayer opted to be taxed at
graduated rates or has failed to signify the chosen
option.

However, if the option availed is the 8% income tax

rate, the taxable base is the gross sales/receipts
and other non-operating income.”
What are the implications of availing of the 8% Tax
Rate?

The eight-percent (8%) tax rate filers should take note of the
following:

➢ You are no longer required to file and pay Percentage Tax

(BIR Form 2551Q);
➢ You are not required to attach your financial statements
when filing your annual income tax return;
➢ You are no longer allowed to deduct expenses incurred by
the business.
Formula for computing your income tax based on the 8% tax
rate, depending on taxpayer type:

For self-employed individuals earning income solely from

business and/or profession:
Income tax due = 8% x [Gross sales or receipts +
Non-operating income – ₱250,000]

For mixed income-earners:

Income tax due = [8% x Gross sales or receipts + Non-operating
income] + Tax due on compensation income (based on
graduated tax rates)
➢To compute the tax due, you only
need to multiply the 8% tax rate by
the total gross sales or receipts
minus ₱ 250,000.00.

➢Moreover, choosing the 8% tax rate

would exempt you from paying the 3%
Percentage Tax (now 1% until 2023).
Sample Computation: Illustration 1
Ms. Terry operates a convenience store while she offers
bookkeeping services to her clients.

In 2018, her gross sales amounted to ₱800,000.00, in

addition to her receipts from bookkeeping services of
₱300,000.00. She already signified her intention to be
taxed at 8% income tax rate in her 1st quarter return.
Her income tax liability for the year will be computed as
follows:
PERSONAL INCOME TAX

Gross Sales-Convenience Store ₱800,000.00

Gross Receipts-Bookkeeping Services 300,000.00
Total Sales and Receipts 1,100,000.00
Less: Annual Deduction (250,000.00)
Taxable Income 850,000.00
Tax Due (₱850,000 x 8%) ₱68,000.00
Sample Computation: Illustration 2
Ms. Terry above, failed to signify her intention
to be taxed at 8% income tax rate on gross
sales in her initial Quarterly Income Tax
Return, and she incurred cost of sales and
operating expenses amounting to ₱600,000.00
and ₱200,000.00, respectively, or a total of
₱800,000.00.
The income tax shall be computed as follows:
 Gross Sales/Receipts ₱1,100,000.00
Less: Cost of Sales (600,000.00)
Gross Income 500,000.00
Less: Operating Expenses (200,000.00)
TAXABLE INCOME 300,000.00

TAX DUE: On excess (₱300,000 - 250,000) x 20%) ₱10,000.00

CONCLUSION:
Aside from the income tax due above, Ms. Terry is
likewise liable to pay business tax.
Activity:

Christy operates an online retail store and works as a

freelancer providing digital marketing services. This year
she earned ₱1,200,000 from her retail activity and
₱700,000 from her freelancing work. Her cost of sales
for the retail activity is ₱650,000 on top of other
operating expenses amounting to ₱230,000.

Compute the income tax due:

a. 8% tax rate b. Graduated rate
a. 8% Tax Rate

Gross sales – Online retail sales ₱1,200,000

Gross receipts – Digital marketing services 700,000
Total sales & receipts 1,900,000
Less: Annual deduction (250,000)
Taxable income 1,650,000
Tax due at 8% income tax rate ₱132,000
b. Graduated Tax Rate
Gross sales – Online retail sales ₱1,200,000
Gross receipts – Digital marketing services 700,000
Total sales & receipts 1,900,000
Less: Cost of sales (650,000)
Gross Profit 1,250,000
Operating expenses (530,000)
Taxable income ₱720,000
Tax due (₱30,000 + (720,000– 400,000) x25%) ₱110,000
• Frequently Asked Questions

1.Q: When can I select between the Graduated Income Rate and the 8% Income Tax Rate
A: You can opt for the 8% income tax rate upon registration (form 1905) at
the start of the year, upon filing your 1st quarterly income tax or percentage tax for the
year.
Q: What if I do not select either of the two options?
A: If you fail to opt for the 8% Income Tax Rate, you will automatically be
subjected to the Graduated Income Tax Rate.
Q: Can I change my mind during the year?
A: No. Your selection for a particular tax year is irrevocable.
Q: What happens if in the course of the year, my gross sales exceed ₱3 million?
A: Once your gross sales for the year exceed ₱3 million, you would automatically be
taxed under the Graduated Income Tax Rate for that particular year. Any income tax
paid under the 8% Income Tax Rate will be used as a tax credit against your next tax
payment, which will already be under the Graduated Income Tax Rate computation.