Previously, in our article “2022 Tax Trends and Ends”, I presented sets of updates in taxation to help ensure that taxpayers have the necessary tools to begin the year right. Exactly two months from now, taxpayers are once more expected to embrace new sets of tax rules that are bound to be implemented as we welcome the year 2023.
The changes in the tax rules are a mix of good news and bad news. Rules on lowering income tax rates and decreasing the number of VAT returns to be filed are good news. However, some reliefs offered by the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act are set to expire by the middle of 2023. Here are some of the changes that will take effect next year.
Lowered Graduated Income Tax Rates
Individual taxpayers have something to look forward to in the coming year as income tax rates are set to be reduced in the year 2023. With the objective of rectifying deficiencies and promoting a simpler and more efficient tax system, the Tax Reform for Acceleration and Inclusion (TRAIN) Act, which took effect in 2018, introduced an amendment that decreased the tax rates for middle-income earners on a staggered basis. Come 2023, individual taxpayers with annual taxable income amounting to Php 250,000 or below will continue to be exempted from paying income tax. Taxpayers affected by the further decrease in tax rates are those earning more than Php 250,000 but not over Php 8 million. They used to be subject to the graduated rates of 20% to 32%. Starting January 1, 2023, they will be subject to lower income tax rates ranging from 15% to 30%. High-income earners who have taxable income in excess of Php 8 million will continue to be subjected to a 35% rate.
Note, however, that the present administration through the Department of Finance (DOF) has proposed changes in taxation. The proposals include the deferment of the reduction of the abovementioned income tax rates from 2023 to 2025. This proposal is still subject to ongoing discussion and approval.
Quarterly Reporting of VAT Returns
The TRAIN Act also introduced relief to VAT-registered persons from filing numerous tax returns within a taxable year. Beginning 2023, BIR Form No. 2550-M (Monthly Value-Added Tax Declaration) is no longer required to be filed and paid. The filing and payment shall be done within 25 days following the close of each taxable quarter, or on a quarterly basis using BIR Form No. 2550-Q (Quarterly Value-Added Tax Return).
The said change will only require taxpayers to file a total of four VAT returns as compared to the normal 12 times of filing within the taxable year. This will also provide ample time to gather all necessary supporting documents for the taxpayer’s claim of input VAT.
Reversion to Original Rates of the Previously Lowered Tax Rates
The implementation of the CREATE Act in 2021 provides tax reliefs to address the fluctuating needs of the business sectors that are caused by the COVID-19 pandemic. These include a reduction in the tax rates for a specific period which is part of economic recovery measures implemented by the government. As time progresses and with the expected recovery from the pandemic, it is also anticipated that some of the tax reliefs offered by the government will eventually cease to be implemented, and reversion to original tax rates will take place. Some of the updates in the tax rates that will be affected by the gradual recovery of the country from the pandemic are as follows:
a. 2% Minimum Corporate Income Tax (MCIT)
Under the CREATE Act and per Revenue Regulations (RR) No. 5-2021, the MCIT was lowered to 1%, effective July 1, 2020 to June 30, 2023. Starting July 1, 2023, corporations (except non-profit proprietary educational institutions and hospitals, and non-resident foreign corporations) will now be subject to the original 2% MCIT rate based on their gross income.
b. 10% Special Income Tax Rate for Non-Profit Proprietary Educational Institutions (PEIs) and Hospitals
The CREATE Act also brought with it a lowered special income tax rate of 1% for PEIs and hospitals, beginning July 1, 2020 until June 30, 2023. On July 1, 2023, these corporations will be subject again to a higher rate of 10%. However, if the gross income from “unrelated trade, business or other activity” exceeds 50% of the total gross income derived from all sources by such educational institutions or hospitals, their entire taxable income shall be subject to the regular income tax rate.
c. 3% Percentage Tax for Non-VAT Taxpayers
Under Section 116 of the Tax Code, it was mentioned that any person whose sales or receipts are exempt under Section 109 (CC) of the Code from the payment of Value-Added Tax and who is not a VAT-registered person shall pay a tax equivalent to 3% of his/her gross quarterly sales or receipts, provided that cooperatives shall be exempt from the 3% gross receipts tax herein imposed.
With the amendment in the CREATE Act, the 3% percentage tax was lowered to 1% beginning July 1, 2020 until June 30, 2023. After the said period, effective July 1, 2023, the percentage tax rate will revert to 3%.
Work From Home (WFH) Arrangement for Philippine Economic Zone Authority (PEZA) – Registered Information Technology (IT) – Business Process Management (BPM) Entities
The Fiscal Incentives Review Board (FIRB) issued FIRB Resolution No. 026-02 allowing IT-BPM entities to continue adopting the WFH arrangement not exceeding 30% of the total workforce, without adversely affecting their income tax incentives, until December 31, 2022. Furthermore, IT-BPM entities may transfer their registration to the Board of Investments (BOI) from the Investment Promotion Agencies (IPA) administering an economic zone or freeport zone where the project is located, until December 31, 2022.
With the said issuances, the IT-BPM entities are expected to have fully complied with the BOI registration starting January 1, 2023 and are entitled to adopt up to 100% WFH arrangement.
Dealing with these continuous changes in taxation can be exhausting and overwhelming most of the time. Taxpayers should always have the necessary information to help themselves overcome the unknown. Knowing the correct rules means winning half the battle in the continuous quest to become compliant taxpayers.
Let's Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
As published in BusinessWorld, dated 01 November 2022