Study of the new income tax schedule of the TRAIN Law

Republic of the Philippines Palawan State University College of Business and Accountancy

“THE TRAIN LAW: GRADUATED INCOME TAX SCHEDULE FOR INDIVIDUALS”

A Research Paper Presented to Mr. Mark Gil A. Tito

Submitted By: De Leon, Jeannie Fe S. Salvacion, Lean Angel Y.

January 2018

CHAPTER 1 INTRODUCTION Background of the study

The Philippines has different income tax rates for individuals, corporations, and  partnerships. Knowing the right income tax return that an individual will pay can make his life  better. A taxpayer must pay his/her taxes properly because it is required that taxes should be paid so that the government have a budget or fund to make the projects that can help the people in this country. The failure to pay one’s tax is punishable by law. Income tax is one of many taxes that should be paid by a taxpayer. According to the bir.gov.ph, “Income Tax is a tax on a person's income, emoluments, profits arising from property, practice of profession, conduct of trade or  business or on the pertinent items of gross income specified in the Tax Code of 1997 (Tax Code), as amended, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income, by the Tax Code, as amended, or other special laws”.

Individual taxpayer include employees and self-employed persons engaged in business or  practice of profession. The Philippines usually uses graduated income tax rates for individuals, which is a form of progressive computation that increases the tax rate as the taxable income increases. For 20 years, the Philippines follow the tax rates stated in the Tax Reform Act of 1997.

Because the new administration promised that they will implement a fairer tax reform  program, President Duterte has already signed the Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) bill aiming to earn revenues to fund the country’s infrastructure program. The new TRAIN law revises most of the Tax reform act of 997.

The TRAIN law will reduce the personal income tax rates of each individual, while  people earning a lower personal income will be free from tax.

The new TRAIN law will foregone the tax rates from those who have an annual income, not over P250, 000. While people earning more than P250, 000 but not over P400, 000 annually will be charged with 20 percent tax on the excess over P250, 000.

Annual income over P400, 000 but not more than P800, 000 will pay worth P30, 000 and will be charged about 25 percent of the excess over P400, 000.

People earning more than P800, 000 but not over P2 million per year will be charged with P130, 000 plus 30 percent of the excess over P800, 000.

Individuals with over P2 million annual income will pay P490, 000 plus 32 percent of the excess over P2 million.

The yearly income of over P8 million will have a tax of P2, 410, 000 plus 35 percent of the excess over P8 million.

Statement of the problem

This study seeks to answer the following questions: 1. What is the new the new graduated income tax schedule in the TRAIN Law? 2.

What are the differences between the old and new graduated income tax schedule for individuals?

3. Which is more favorable for the individual taxpayer?

Objective of the Study

The general objective is to know the new income tax rates of TRAIN law implemented by the new administration for the individual taxpayer and what are its effect to the income tax return  being paid by an individual taxpayer. Specially, this study aims:

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To assess the new tax rates for individual taxpayers

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To recognize the effects and benefits of the new income tax rates for individuals.

Significance of the study

This research can give additional information for business students about the new tax law and individual tax payer about the new tax rates in the TRAIN law.

CHAPTER II Review of related literature

The BIR stated the following:

Annual Income Tax for Individuals Earning Purely Compensation Income (Including Non-Business/Non-Profession Related Income) and For Marginal Income Earners

Tax Form

BIR Form 1700 - Annual Income Tax Return (For Individual Earning Purely Compensation Income Including Non-Business/Non-Profession Related Income)

Annual Income Tax for Self-Employed Individuals, Estates and Trusts (Including Those with Mixed Income, i.e., Compensation Income and Income from Business and/or Practice of Profession)

Tax Form

BIR Form 1701 - Annual Income Tax Return (For Self-Employed Individuals, Estates and Trusts Including Those with Both Business and Compen sation Income)

Account Information Form for Self-Employed Individuals, Estates and Trusts (Including Those with Mixed Income, I.E., Compensation Income and Income from Business and/or Practice of Profession)

Tax Form

BIR Form 1701 AIF - Account Information Form for Self-Employed Individuals, Estates and Trusts (Including those with Mixed Income, i.e., Compensation Income and Income from Business and/or Practice of Profession) and Estates and Trusts (Engaged in Trade or Business)

 NOTE: Pursuant to Revenue Memorandum Circular No. 6 –   2001, corporations, companies or  persons whose gross quarterly sales, earnings, receipts or output exceed P 150,000.00 may not accomplish this form. In lieu thereof, they may file their annual income tax returns accompanied  by balance sheets, profit and loss statement, schedules listing income-producing properties and the corresponding income therefrom, and other relevant statements duly certified by an independent CPA.

Quarterly Income Tax for Self-Employed Individuals, Estates and Trusts (Including Those with Mixed Income, I.E., Compensation Income and Income from Business and/or Practice of Profession)

Tax Form

BIR Form 1701Q - Quarterly Income Tax Return for Self-Employed Individuals, Estates and Trusts (Including those with both Business and Compensation Income)

The Old Graduated Income Tax Schedule

The Philippine Tax Code imposes these graduated income tax rates for individual taxpayers who are:

1. Resident citizens on their taxable income from all sources within and outside the Philippines.

2. Nonresident citizens on their taxable income from all sources within the Philippines. 3. Resident aliens on their taxable income from all sources within the Philippines. 4. Nonresident aliens engaged in trade or business within the Philippines on their taxable income from all sources within the Philippines.

These rates will be based on the amount of your net taxable income, which is the net of your gross taxable income less your allowable deductions (itemized ded uctions or optional standard deductions) and personal and additional exemptions. Please read our  post on how to compute income tax for self-employed individuals to learn more.

Take note that non-resident aliens who are not engaged in trade or business within the Philippines are taxed at fixed rate of 25% instead of the graduated tax rate on their gross amount of income derived from all sources within the Ph ilippines.

Furthermore, aliens employed by Regional Headquarters (RHQ) or Area Headquarters and Regional Operating Headquarters (ROH), Offshore Banking Units (OBUs), Petroleum Service Contractor and Subcontractors are taxed at fixed rate of 15% on their gross income in the Philippines.

CHAPTER III RESEARCH INSTRUMENT USED

The study used this instrument in collecting the data in order to arise with desired objectives. Data gathering instrument Interviews  –  the proponents gathered information directly to some individual taxpayers. It

is needed to get detailed information about their opinion about the new graduated tax schedule for individual in the TRAIN law.

COMPARISON The differences off the old graduated income tax schedule for individual and the TRAIN law: new income tax schedule for individual.

Old BIR Income tax Rates (Used until 2017) BRACKET

INCOME PER YEAR

TAX RATE

1

P10,000 and below

5%

2

Above P10,000 to P30,000

P500 + 10% of the excess over P10,000

3

Above P30,000 to P70,000

P2,500 + 15% of the excess over P30,000

4

Above P70,000 to P140,000

P8,500 + 20% of the excess over P70,000

5

Above P140,000 to P250,000

P22,500 + 25% of the excess over P140,000

6

Above P250,000 to P500,000

P50,000 + 30% of the excess over P250,000

7

Above P500,000

P125,000 + 32% of the excess over P500,000

New BIR Income Tax Rates, from TRAIN Tax Reform (2018-2022) BRACKET GROSS INCOME PER YEAR P250,000 and below 1

INCOME TAX RATE

0%

2

Above P250,000 to P400,000

20% of the excess over P250,000

3

Above P400,000 to P800,000

P30,000 + 25% of the excess over P400,000

4

Above P800,000 to P2,000,000

P130,000 + 30% of the excess over P800,000

5

Above P2,000,000 to P8,000,000 Above P8,000,000

P490,000 + 32% of the excess over P2,000,000 P2,410,000 + 35% of the excess over P8,000,000

6

New BIR Income Tax Rates, from TRAIN Tax Reform (2023-onwards) BRACKET INCOME PER YEAR

TAX RATE

1

P250,000 and below

0%

2

Above P250,000 to P400,000

15% of the excess over P250,000

3

Above P400,000 to P800,000

P22,500 + 20% of the excess over P400,000

4

Above P800,000 to P2,000,000

P102,500 + 25% of the excess over P800,000

5

Above P2,000,000 to P8,000,000 Above P8,000,000

P402,500 + 30% of the excess over P2,000,000 P2,202,500 + 35% of the excess over P5,000,000

6

COMPUTATIONS Income Tax = Income per year tax rate Example:

1.) Income per year = 300,000 Tax Rate of 300,000 => Above 250, 000 but not more than 400,000 Income tax = (15% x (300000-250000)) Income Tax = P7, 500

2.) Income per year = P 950,000 Tax Rate of 900,000 => Above P800, 000 to P2, 000,000 Income Tax = P102, 500 + (30% x (950,000-800,000)) Income Tax = P130, 000 + 45,000 Income Tax = P175, 000

CHAPTER IV PRESENTATION OF DATA Description of The Old Graduated Income tax Schedule

The Tax Reform Act of 1997 gives us the table for the old Income tax schedule. The taxes rate start at P10, 000 income per year on which it has a 5% income tax return and individual taxpayer who earned P500, 000 and above annually has the same tax rate of P125, 000 + 32% of the excess over P500, 000. Even though a person who has a small amount of income per year is required to pay his or her income tax as long as they are engaged in business or practice their  professions. Income of residents in Philippines is taxed progressively up to 32%. Resident citizens are taxed on all their net income derived from sources within and without the Philippines. For nonresident, whether an individual or not of the Philippines, is taxable only on income derived from sources within the Philippines. Taxable Income (PhP)

Tax Rate

Php 0 – 10,000

5%

Php 10,000 – 30,000

10%

Php 30,000 – 70,000

15%

Php 70,000 – 140,000

20%

Php140,000 – 250,000

25%

Php 250,000 – 500,000

30%

Php 500,000 and above

32%

 The above rates apply to individuals who derive income from business (including capital

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gains from the sale transfer or exchange of shares in a foreign corporation) or from the  practice of a profession.   Individuals holding managerial and highly technical positions employed by RHQs1,

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ROHQs2, multinational companies and offshore business units are taxed at 15% on their gross income. Income in Philippines is divided into the following three categories which are taxed separately, as summarized below. 1. Compensation employment income: This income is taxed at progressive rates on gross income after deduction of personal and additional ex emptions but without deductions for expenses. 2. Passive income: This income, including dividen ds and interest, is subject to tax at 7.5%. 3. Business income and professional income: This income is taxed at progressive rates on net  business income after deduction of certain specified expenses.

The researcher conducted an interview to 3 people and the following questions were ask.

Question Number 1: How much is your Income Annually Income per year

1

2

3

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100,000-250,000 250,000-400,000

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400,00-800,000

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800,000-2,000,000 2,000,000-8,000,000 Figure 1

Figure 1 shows the amount of income annually of the 3 individual who was interviewed for this research. 1 of them answered that his ranges from 250,000-400,000 pesos, the other one answered that his income ranges from 800,000-2,000,000 and the last one answered that her income ranges from 100,000- 250,000 Pesos.

Question Number 2: Are you aware of the New TRAIN law implemented by the President?

Person

YES

1

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2

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3

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NO

Figure 2

Figure 2 shows if the person is aware or know the new TRAIN law implemented. All of them answered yes.

Question 3: Are you in favor in the new TRAIN law? Why or why not? Person

Yes or No

Reason

1

No

It is unfair because we are the ones who’ll have to  pay taxes  just because are income 250,000 and above.

2

Yes

3

Yes

Because my income tax return in the new graduated income tax schedule is lower than the old one. Because I don’t have to pay the individual tax return anymore.

Figure 3

Figure 3 shows the answers of the individual who was interviewed for the 3rd questions. One of them are not in favored in the new tax law and others are favored. They also states their own reasons for their answers.

CHAPTER 5 CONCLUSION

The new income tax schedule of the TRAIN law signed by the president and impose starting this year will sure affect the life of both the poor and rich individual that are engaged in  business or who practice his or her profession. The TRAIN law will reduce the personal income tax rates of each individual, while people earning a lower personal income will be free from tax. The tax rates are very different from the Tax reform act of 1997 that are implemented for over 20 years in the Philippines. Some of the differences of the new income tax sch edule in the old income tax schedule are 1. The income tax brackets are reduced to six, 2. Individual who earned 250,000 and below are not subject to income tax and 3. Individual who earned 500,000 and above has now a more detailed income tax rate than before. Although many of individual will be in favor in the new graduated income tax schedule, there are still some individual who are not. The new graduated income tax schedule is more favorable to lower level individuals than those who are in the middle and upper class. If the government implement this in a good way, I think that this may be a solution to make our economy increase and help the Filipino citizen more.

APPENDICES

BIBLIOGRAPHY

https://www.bir.gov.ph/index.php/train.html https://www.pinoymoneytalk.com/old-income-tax-rates-nirc-tax-tables/ http://www.wipo.int/wipolex/en/text.jsp?file_id=224718 https://www.bir.gov.ph/index.php/tax-information/income-tax.html https://philnews.ph/2018/01/03/adjusted-income-tax-rates-train-law/ https://www.pinoymoneytalk.com/new-income-tax-table-rates-philippines/