Conclusion
There are a lot of those previously exempt from value-added tax (VAT) or zero-rated VAT transactions that are being disallowed under the Tax Reform for Acceleration and Inclusion. However, these transactions are usually not applicable anyway to business enterprises. Though these proposed changes in the VAT law are quite significant, let me just skip these and go to one change closer to the heart of start-up businesses.
A lot of start-up business owners still do a lot of freelance work in order to sustain a bootstrapping business. While previously, self-employed or freelancers, including professionals, are subject to the 3-percent other percentage tax (OPT) in lieu of VAT (when gross sales or gross receipts do not exceed the VAT threshold of P1,919,500)—this is being changed under the proposed tax reform—I can’t say for sure if it’s for the better or for worse since it really depends on your business.
Under the proposed tax changes, self-employed and/or freelancers are no longer subject to the 3-percent OPT. The following summarizes the information that you need to know about the proposed changes:
VAT threshold is increased from P1,919,500 to P5,000,000—this is seen as a positive change to allow improved wiggle room for business entities, self-employed and freelancers to pay a 3-percent OPT instead of being subjected to a heavy burden of 12-percent VAT.
Self-employed and/or freelancers whose gross sales or receipts do not exceed the VAT threshold (P5 million) are subjected to 8-percent income tax on gross sales or receipts in excess of P250,000.
Self-employed and/or freelancers whose gross sales or receipts exceed the VAT threshold will be taxed in the same manner as corporations.
Now, is this a good change? If your income is below P250,000 per year, then definitely this is a good change for you, since you don’t have to pay anything. Earning below P400,000 a year, you are still better off with the tax reform, but anything more than that—you will start feeling the pain of the 5-percent hike in tax rate.
Now, if you’re currently earning more than P1,919,500—you benefit from the tax savings of 7 percent (12-percent VAT less 5-percent new tax rate). But more than P5 million, it gets pretty complicated. It’s a balance between subjecting your gross income to 12-percent VAT (under the current tax code) and net income to 30-percent income tax (under the tax reform).
The tax-reform measure passed by the House of Representatives is still subject to Senate deliberations. As a result, there still may be some changes in the tax proposals. However, early understanding of its impact on your business, as well as your personal income, is crucial to proper financial planning.
For companies that are previously enjoying zero-rated VAT or VAT exempt, read more on these proposed tax measures or drop an e-mail to your accountant or tax advisor. Your preferential transactional tax might have been taken away from you with this tax-reform changes.
Filbert Tsai is a Filipino accounting advisor in the UK with global and public-sector experience. His key areas of interests are start-ups and MSMEs. His blog and page, Ask the Accounting Advisor, provide relevant insight for start-ups and MSMEs in the Philippines.
This column accepts contributions from accountants, especially articles that are of interest to the accountancy profession, in particular, and to the business community, in general. These can be e-mailed to boa.secretariat.@gmail.com.