Implementation issues in the new income tax law

by: Arnold P. Supilanas
(Published in BusinessWorld on July 1, 2008)

The long wait of over half a million minimum-wage earners for the much-needed tax relief is now over as the President signed into law last June 17 Republic Act (RA) No. 9504, exempting minimum-wage earners from income tax.

This law is, indeed, a welcome relief for the minimum-wage earners given the current rice crisis in our country as well as the never-ending increase in prices of fuel which often leads to price increases in almost all our basic needs.

The term "minimum wage earner," as defined in the new law, refers to a worker in the private sector paid the statutory minimum wage, or to an employee in the public sector whose compensation income of not more than the statutory minimum wage for the non-agricultural sector in the locality or region where he/she is assigned.
Other salient features of the new law, aside from the income tax exemption of the minimum-wage earners, are:

          § the increase in the basic personal exemption for individual taxpayers from the previous P20,000 for single, P25,000 for head of the family and P32,000 for married individual to P50,000 regardless of the civil status;

           § the increase in additional exemption for qualified dependents from P8,000 to P25,000;

           § the increase of the rate of the optional standard deductions (OSD) for self-employed individuals from 10% of gross income to 40% of gross sales or receipts; and,

           § the inclusion of the corporation in the 40% OSD coverage, in lieu of the itemized deductions.

Apparently, the income tax exemptions and increases in personal and additional exemptions would cost the government billions of pesos in foregone revenues. However, as justified by the legislature, the increase of the rate of the OSD for individuals and the inclusion of corporations in the OSD coverage are expected to generate additional revenues more than enough to offset the aforementioned foregone revenues.

Whether this objective can be achieved depends on how the new law, particularly the provisions pertaining to the OSD, will be implemented. For this reason, the implementing rules that the BIR will be issuing is much awaited.

From a careful reading of the new law, certain questions and critiques have been raised relative to the implementation of the OSD. Examples of these are the following:

          1. When should individuals or corporate taxpayers decide whether to use itemized deductions or 40% OSD? Should this be made when they prepare their annual income tax returns at the end of their taxable year, or even earlier when they file their first quarterly income tax return for the year? Can they use the itemized deductions in the first three quarters and then make a final choice on their final adjusted return to adopt the OSD?

For that matter, for this year of implementation, will BIR allow taxpayers that have been filing their quarterly income tax returns using itemized deductions to elect the 40% OSD when they compute for their annual income tax?

           2. There is an interesting observation that the Tax Code provision enumerating the deductions supposed to be replaced by the OSD, if the latter is elected, refers to "deductions from gross income" and not deductions from gross sales. Gross income, under existing tax rules and regulations, is defined as gross sales or gross revenue minus cost of goods sold or cost of services.

Following this logic, will a taxpayer be allowed to claim cost of sales or cost of services against its gross sales or revenues to arrive at gross income and then, deduct a standard deduction equal to 40% of its gross income? Or will the 40% OSD be the only deduction to be allowed against gross sales or revenues?

An equally interesting observation is that the law provided dif ferent bases for the OSD — for individuals, the 40% is based on his gross sales/receipts, while for cor poration, this is based on its gross income. How will these different tax bases affect the tax liability of e ach type of taxpayer?

           3. Will a corporate taxpayer that opted to avail the 40% OSD still be subject to the 2% minimum corporate income tax (MCIT)? Can the unexpired excess of MCIT over the normal income tax in prior years be used as credit against the normal income tax computed based on the 40% OSD?

           4. Can companies registered with the Philippine Economic Zone Authority and under the 5% special tax regime avail of the 40% OSD? What would be the basis of the 40% OSD?

Considering that government expects to entice a greater level of tax compliance with the introduction of the OSD, it is hoped that the tax rules to be introduced by BIR will be simple for taxpayers to comply.
It is also hoped that, in coming up with the rules, BIR will keep in mind the provisions and intent of the new law and not how it believes the law should be implemented.

The power given to them is not the discretion to determine what the law should be, but how the law may be enforced and executed.