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Tax Filing in the Philippines: Choosing Graduated Rate or 8% Threshold Rate

What are the important factors that come into play with the new tax filing policies?

  1. Mechanics
  2. Conditions
  3. Qualifications

Tax filing in the Philippines can be a very daunting and tricky task. With President Duterte’s implementation of TRAIN (Tax Reform for Acceleration and Inclusion), there have been several new policies that fall in line with the new tax reform laws. DIY or freelance taxpayers are faced with major changes from the previous frequency, processes, formulas, and tax tables that were previously applied in the country.

According to the Bureau of Internal Revenue or BIR, if a professional is earning less than P250,000 on an annual basis, then he or she is exempt from paying percentage income tax or the 8% gross receipt tax. In terms of the new TRAIN laws, this simply means that you are not required to file any tax return. The past threshold for VAT taxpayers was P1,919,000 and is now currently raised to P3,000,000.

There are many new changes and that directly affect your calculated tax rates. One of which is that professionals are given certain options to adhere to when it comes to legal tax processing. So, it is important that you make sure that the tax calculator you are using is using the current system for calculation.

Below are overviews on what goes into the new income tax reform laws:

Tax Alert Mechanics

Under Republic Act No. 10963 of the TRAIN Law: graduated income tax rates for individuals have been reduced to income below P8,000,000. Payment of the following to taxable judicial persons remain subject to 10% or 15% expanded withholding tax rate:

  1. Professional fees, talent fees, commissions of serves rendered.
  2. Distribution of income to estate and trust beneficiaries.
  3. Income payment to brokers and agents
  4. Income payment to partners of GPP
  5. Medical practitioner professional fees
  6. Commission of independent or exclusive sales representatives and company marketing agents.

The reduction of withholding tax rate for self-employed individuals was implemented in order to be aligned with the 8% optional tax on gross receipts for considerations on the lower tax rates of individual income.

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Income Tax Conditions

Self-employed individuals and professionals are now given a choice for their applied tax rates that identify their income tax liability. However, there are considerations that need to be met and observed before the taxpayer can select the options. Taxpayers that practice his or her profession and earn purely from self-employment have the option to avail of the following conditions:

  1. The graduated income tax rates –under Section 24, A, 2, a of the Tax amended.
  2. The 8% tax on gross sales and other non-operational income that is in excess of P250,000, in substitute of the graduated income tax rates under Section 24(A) and percentage tax under Section 116 of the Tax Code.

Taxpayer Qualifications

If you are an individual taxpayer earning annual gross sales of P2,000,000 from your business, according to the Tax Reform for Acceleration and Inclusion laws, the 8% flat tax rate option for self-employed professionals can be valid under certain qualifications.

An individual that earns from purely business-related income or mixed-income can only apply the 8% tax rate for the business income only. Non-VAT registered individual taxpayers of the following are granted the 8% flat tax rate option:

  1. Domestic carriers of garages
  2. International shipping carriers with business in the Philippines
  3. Water and gas utilities
  4. Television and radio broadcasting companies with annual gross receipts of the previous year that do not exceed P10,000,000
  5. Overseas dispatch coming from the Philippines
  6. Banks and financing intermediaries performing quasi-banking operatives
  7. Life insurance companies
  8. Authorized insurance agents
  9. Cockpits
  10. Cabarets, day or nightclubs, karaoke bars, karaoke bars, music lounges
  11. Boxing matches
  12. Professional Basketball
  13. Jai-alai and racetracks
  14. Horse race winnings
  15. Exchange of stock shares traded through the local stock exchange
  16. Exchange of stock shares in closely-held corporations

Gross receipts and sales that do not surpass the new VAT threshold of sales receipts accumulating to P3,000,000 are viable flat tax candidates. Signifying your intent by filing the 8% flat tax rate for the first quarterly income tax also grants you the 8% option.

Key Takeaway

It is crucial that you be well-acquainted with the new TRAIN laws when it comes to tax filling in the Philippines. The new tax income rates provide for many options where self-employed professionals and individuals can optimize his or her earnings.

Whether you are doing your own tax filing, working with a hired accountant for his or her services, or utilizing an online tax calculator, the new formalities that gravitate towards President Duterte’s TRAIN law implementations pose fundamental and structural changes to how your tax rate is determined.

Ultimately, the purpose of these changes is to incorporate a flat tax regime that is simpler and open to options to comply with self-employed individuals and professionals.

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16 thoughts on “Tax Filing in the Philippines: Choosing Graduated Rate or 8% Threshold Rate”

  1. Hi! I’m currently working as a self employed individual. I have some question about the 8% flat rate. How about if your going to exceed with the 250k? How much are you going to pay for the excess?

  2. Is it better to apply 8% threshold rate? At BIR I’m asked to answer yes or no about the 8%, the counter lady told me usually 3% are paid annually by self employed individuals such as myself, with or without exceeding 250k gross sales.but with 8% i don’t have to file two forms in paying taxes,with just an valid ID,and if i earn less than 250k GS. I will be exempted on my tax return given also i won’t need to pay anybody guide me .

  3. Hi it is also my problem ,my business is a sole proprietorship.will i avail the 8% income tax rate .just starting my business .im a building houses.please i need to know .any one there please help

  4. Hello Taxumo,
    I am an employed and at the same time with a business. My business is non vat and we are paying 3% percentage tax quarterly.
    My annual compensation is not more than 250k, also with my business.
    what should I choose in the tax rate? How will I proceed with my 1701?
    Thank you!

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    1. Maria Millicent Dela Cruz

      Hello Jakub,

      Kindly be guided that you may only change the income tax rate type every year. So if you started year 2022 with graduated income tax, this should be applied for the whole year.

      Hope this clarifies 😉

  6. Hi Taxumo,

    I’m not sure if I have the same situation with anyone in the comments. I will become an independent contractor in this part-time job where I have to secure COR and SD and other gruesome BIR forms to fill out plus the booklet/receipt to issue them monthly. The average I will get here is only 5k/month. I will also have a full-time job where basic package is above minimum wage. But definitely I will NOT reach the VAT threshold.

    Which income tax rate option do I choose? i hope to read from you soon. Need your help. Thank you,

    1. Hello CJ,

      Good day!

      You may opt to apply and use the 8% rate. This rate is exempted of business tax (percentage tax) and have an annual income threshold of 250k. For the 8% Flat Income Tax Rate Type, here are some articles you may read on to help you understand more about it.

      Let us know what you think after reading them. 😊

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