Have you filed your 2019 annual income tax return (ITR)?
To make sure you won’t pay the 25 percent surcharge, 20 percent interest and compromise penalty, make sure to file and pay your income tax on or before June 14. Note, however, that for individual taxpayers, the first quarter ITR for taxable year 2020 is also due on June 14 while nonindividual or corporate taxpayers may file on or before June 29.
Whether companies are liquid, ready or not, taxes are coming due amid this crisis. As the Bureau of Internal Revenue (BIR) already reiterated, no more extensions as the government is in dire need of money to respond to the pandemic.
But beyond paying taxes, successful businesses will be those who will focus on saving money on taxes and creating more value in the new normal—the new or digital economy.
So, how to save money on taxes especially during the crisis? Here are some basic tax principles and concepts to help individual or nonindividual taxpayers stay out of trouble with BIR and stay in compliance with the Philippine tax laws:
File and pay taxes correctly and on time to avoid penalties. If you want to know the applicable tax deadlines for your company, refer to BIR Form No. 2303, or certificate of registration where the tax types and deadlines including the specific forms to be used are all indicated.
Per Revenue Memorandum Circular No. 48-2020, taxpayers may file and pay taxes at the nearest Authorized Agent Banks (AABs) notwithstanding revenue district office (RDO) jurisdiction, or file the tax return and pay corresponding tax due to the concerned revenue collection officers of the nearest RDO, even in areas where there are AABs.
Every year, you are given a choice: 8 percent optional tax or graduated income tax, value-added tax (VAT) or non-VAT, itemized deduction or optional standard deduction (OSD), among others. If you choose wisely, you can save money from paying unnecessary taxes.
Under the Tax Reform for Acceleration and Inclusion (TRAIN) Act, self-employed and professionals whose annual gross revenues do not exceed P3 million may elect to use the 8 percent optional tax rate in lieu of both income tax and percentage tax. The VAT threshold has also been increased to P3 million, which means those who do not exceed it may change registration from VAT to non-VAT.
For both individual and corporate taxpayers, they have an option to claim itemized deductions subject to substantiation or the 40 percent OSD. The choice has to be made upon filing of the first quarter ITR.
Amid the COVID-19 pandemic, countries around the world are implementing various emergency tax relief to address business and household liquidity issues. In the Philippines, we have at least two urgent pending tax reform bills, which can help businesses bounce back. The first one is the immediate reduction of corporate income tax from 30 percent to 25 perc ent effective July 2020 as proposed under the CREATE bill, or Corporate Recovery and Tax Incentives for Enterprise Act.
Citira or Corporate Income Tax and Incentives Reform Act has been renamed to CREATE with three major improvements:
1. Reduction of the corporate income tax and longer net operating loss carry-over for losses of small businesses in 2020;
2. Flexibility in the grant of incentives including nontax incentives; and
3. Longer transition period for firms currently enjoying the gross income earned incentive.
If your taxable income exceeds P8 million and you want to pay 25 percent instead of 35 percent income tax, it’s a no-brainer to register a corporation and not a sole proprietor who is subject to the highest 35 percent for ultra-rich individual taxpayers or those whose income exceeds P8 million.
Who wants to pay penalties and interests? Nobody. That’s why Republic Act No. 11213, or Tax Amnesty Act was passed swiftly. However, the President vetoed provisions on general tax amnesty—which is the second urgent pending tax reform bill if the government wants to collect at least P45 billion.
For delinquency tax amnesty, the rates start at 40 percent of the basic tax for cases which are final and executory, 50 percent for cases subject to final judgment of the courts and 60 percent for tax evasion cases pending before the Department of Justice, or the courts.
If you have delinquent accounts and you wish to avail of this tax amnesty, deadline is on June 22.
For estate tax amnesty, aside from waiving all penalties, interests and compromises, the estate tax rate is only 6 percent based on the value at the time of death or a minimum of P5,000 per transfer. Deadline is in June 2021. No need to rush but better to prepare all documents if you want to save money on estate tax arrears.
Fixing tax problems
Avoid tax avoidance if you are not certain. Charitable contributions or donations and losses are both deductible expenses which require substantiation. Otherwise, it may be disallowed during BIR audit and investigation and may even be subject to penalties and compromises.
Paying the right taxes is not necessarily paying more taxes.
In order to pay the right taxes, you need to hire a good and honest accountant. But sometimes, your nonaccounting staff can be trained to do both the bookkeeping and tax compliance as long as you can trust them to take care of your taxes. You may also outsource or hire tax professionals for a quarterly or annual tax compliance review just to make sure that any possible tax exposure is addressed before BIR audit.
For those who are audited yearly by the BIR, you really need to fix your tax problem and avoid paying under-the-table which maybe one of the reasons why BIR examiners want to check on you every year. Hiring a “fixer” who will simply negotiate with the BIR examiner may help settle your tax assessment in the meantime but not necessarily fix your tax problems.
How to fix our tax problems?
a. Legislation – a lot of the tax problems we encounter is attributed to our rigid and outdated tax laws. Either the rates are too high, or they are simply too many and complicated for an ordinary taxpayer to comply.
If you want to save money on taxes, you have to know and understand the Comprehensive Tax Reform Program of the government so you can support the bills which you think can really help lessen the tax burden and avail of the tax benefits once they get passed into law.
After the historic passage of the TRAIN Act, which increased the exemption for personal income tax to P250,000, the tax amnesty act and higher excise taxes for cigarettes and alcoholic drinks were also legislated. The next tax reform bills will lower corporate income tax and rationalize fiscal incentives, offer general tax amnesty, and focus on real property valuation and financial income.
After the general tax amnesty, the BIR and the Bureau of Customs (BOC) must be able to send tax evaders and smugglers to jail. Otherwise, tax evasion and smuggling will continue to proliferate as they get away with tax authorities by compromising their cases.
b. Administration – equally important in reforming the tax system is improving tax administration. Tax policy reforms must be complemented and supported by tax administration reform. Bureaucracy and corruption will only be addressed by digital transformation or automation of most of the transactions or dealings with taxpayers including audit and investigation.
The government can keep adding new taxes but unless it addresses the tax leakages and invests in IT infrastructure and capabilities so BIR examiners will be equipped to assess conglomerates and international tech companies with more sophisticated business models, it will not improve tax collections or the tax effort ratio significantly to hit revenue targets.
That’s mainly the reason why new taxes, including the proposed digital tax, must be studied carefully both on policy and administration perspective if we don’t want to send civilians to war.
The key areas for tax reform have always been broadening both the tax and taxpayer base, simplifying tax compliance and lowering tax rates to make it more competitive and acceptable to both individual and nonindividual taxpayers.
c. Compliance – the successful completion of the ongoing tax reform and digital transformation of both BIR and BOC will gradually improve tax compliance.
But what can businesses do during this crisis to prepare for audit, amnesty or tax compliance? Equally important to ask is how can businesses help the government to restart the economy?
There is no simple or easy answer but definitely a comprehensive tax audit and compliance review must be done now while we are on a lockdown. If the government will offer a tax relief, we should also do our share to help the most vulnerable ones by paying our taxes correctly.
Fixing the tax system is the government’s mandate, but fixing our tax problems is our responsibility as a good taxpayer on top of saving money on taxes, penalties and compromises. Take advantage of the economic tax relief offered by the government so you can bounce back stronger and better.
This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or the MAP. The author is a member of the MAP Tax Committee and the MAP Ease of Doing Business (EODB) Committee. He is the cochair of the EODB Task Force on Paying Taxes and the brainchild of TaxWhizPH mobile app. He was recognized as one of the 2017 Outstanding Young Persons of the World, 2016 Digital Mover, one of the 2015 The Outstanding Young Men of the Philippines (TOYM), and an Asia CEO Young Leader because of his tax advocacy and expertise. Currently, he is the chair and senior tax advisor of the Asian Consulting Group (ACG) and founding Trustee of the Center for Strategic Reforms of the Philippines (CSR Philippines).