Understanding the TRAIN Law Tax Table

When it comes to computing your income tax, it’s essential to be meticulous to avoid any penalties from the Bureau of Internal Revenue (BIR) due to miscalculations. This guide will help you understand the key terms and steps involved in income tax computation, specifically under the TRAIN Law Tax Table for 2023.

Please note: This guide is intended for general information purposes only and should not replace professional advice.

Understanding Gross Income

The first step in computing your income tax is determining your gross income. According to the tax code, gross income encompasses all income derived from any source. Here are some specific examples of what constitutes gross income:

1. Compensation income: This includes earnings from an employer-employee relationship, such as salaries, overtime pay, holiday pay, night differential pay, fees, commissions, honoraria, taxable bonuses and allowances, and other benefits.
2. Business and professional income: This includes earnings from running a business or practicing a profession, such as profits from the sale of assets, commissions, service fees, professional fees, rental income, and other incomes not covered by compensation income.
3. Passive income: This includes earnings from sources in which you are not actively involved, such as profits from the sale of real properties or shares of stock, interest earned on bank deposits or investments, annuities, pensions, rents, royalties, prizes and winnings, and a partner’s share from the net income of a general professional partnership.

If you’re earning one or more of these types of income, all of them are included in your income tax computation.

What Is Excluded From Gross Income?

Certain types of income are not included in the gross income computation and are therefore tax-exempt. These include:

• SSS, GSIS, Pag-IBIG, PhilHealth, and other government-mandated contributions.
• 13th-month pay and other benefits (e.g., Christmas bonus, performance-based incentives, etc.) worth Php 90,000 and below.
• De minimis benefits (e.g., paid vacation leave, medical/meal/clothing allowance, rice subsidy, Christmas gifts and achievement awards given to employees, etc.) not exceeding the prescribed maximum amount.
• Union dues from legitimate labor organizations.
• Retirement benefits, pensions, gratuities, etc., which have met the requirements of the law.

Understanding Taxable Income

Taxable income is the amount of your gross income that is subject to tax. It is calculated by subtracting allowable deductions from your gross income. If you’re a self-employed or mixed-income taxpayer, you subtract the deductions allowed by the BIR from your gross income to get your taxable income.

Here’s the basic formula for income tax purposes:

1. Start with your Gross Sales/Receipts/Fees.
2. Subtract any Sales Discounts/Allowances and Sales Returns. This gives you your Net Sales/Receipts/Fees.
3. Subtract the Cost of Sales from your Net Sales/Receipts/Fees to get your Gross Income from operations.
4. Add any Other income not subject to final tax or tax exemption to your Gross Income from operations to get your Total Gross Income.
5. Subtract either your Itemized Deductions or Optional Standard Deductions (OSD) from your Total Gross Income to get your Taxable Income.

Deductions from Gross Income

When calculating your income tax, it’s important to understand what can be deducted from your gross income. If you’re a self-employed or mixed-income taxpayer, you have two methods of deduction to choose from: itemized deduction and optional standard deduction.

1. Itemized Deduction

Itemized deduction involves subtracting all legitimate business expenses incurred during the taxable year from your gross income. These expenses must be directly related to the operation, management, and development of your business or professional practice.

Itemized deductions can include:

1. Business or professional expenses: These include salaries, overhead expenses, costs of production, travel, entertainment, etc.
2. Research and development
3. Interest on debts: This applies to debts related to your business or profession.
4. Tax payments: These are payments related to your business or work, except for income tax, estate tax, donor’s tax, etc.
5. Losses: These include losses from the regular operation of the business, sale of capital assets, etc.
6. Donations: These can be made to the Philippine government, charitable institutions, religious groups, educational/cultural organizations, etc.
7. Actual bad debts: These are receivables from customers or loss on securities held as capital assets that cannot be collected or recovered.
8. Depreciation: This is the decrease in value of property used in business such as vehicles, equipment, etc.
9. Pension trust fund for employees
10. Depletion of oil and gas wells and mines

However, certain expenses cannot be deducted from your gross income. These include living, personal, or family expenses, expenses for construction, improvement, or renovation of a property to increase its value, expenses for property restoration, life insurance premium payments covering any employee, and losses from the sale of property under certain conditions.

2. Optional Standard Deduction (OSD)

The Optional Standard Deduction (OSD) is 40% of Gross Income. The OSD for corporations is similar to the OSD available to an individual earning business income or income from a profession, except that the basis of the 40% OSD for corporations is the gross income, which is net of the cost of sales or services, while for individuals, the basis is gross sales or receipts, before any such costs.

Gross Income for OSD purposes does not include income items already subjected to Final Tax or Capital Gains Tax. The election of the OSD must be communicated in the 1st quarter return. If the corporation used the OSD instead of the itemized deduction in its 1st quarter return, it could not later use the itemized deductions for the Annual Income Tax Return.

TRAIN Law Tax Table

The Philippines’ Tax Reform for Acceleration and Inclusion (TRAIN) Act has been instrumental in restructuring the personal income tax system. With the aim of providing higher take-home pay for employees, the TRAIN Law has introduced graduated income tax rates that vary based on the amount of taxable income an individual earns.

Types of Income Subject to Graduated Rates

The graduated tax rates apply to different types of income, which are:

• Compensation income for local and foreign employees: This is mandatory.
• Compensation income for mixed-income earners: This is also mandatory.
• Business and/or professional income for mixed-income earners and self-employed individuals:
• Mandatory for those with gross sales or receipts above Php 3 million.
• Optional for those with gross sales or receipts equal to or less than Php 3 million.

Graduated Income Tax Rates

Starting January 1, 2023, the following graduated income tax rates are in effect:

• For annual taxable income of Php 250,000 and below: The tax rate is 0%.
• For income over Php 250,000 but not over Php 400,000: The tax rate is 15% of the excess over Php 250,000.
• For income over Php 400,000 but not over Php 800,000: The tax rate is Php 22,500 plus 20% of the excess over Php 400,000.
• For income over Php 800,000 but not over Php 2 million: The tax rate is Php 102,500 plus 25% of the excess over Php 800,000.
• For income over Php 2 million but not over Php 8 million: The tax rate is Php 402,500 plus 30% of the excess over Php 2 million.
• For income over Php 8 million: The tax rate is Php 2,202,500 plus 35% of the excess over Php 8 million.

Context in Southeast Asia

Despite the tax reductions brought about by the TRAIN Law, the Philippines remains among the countries with the highest income tax rates in the Southeast Asian region. The maximum tax rate stands at 35%, which is on par with Thailand and Vietnam, and notably higher than Cambodia’s and Singapore’s 20% rates.

It’s important for taxpayers to be aware of these changes to ensure they are paying the correct amount of tax and to plan their finances accordingly.

How to Compute Your Income Tax Using Graduated Rates

Calculating your income tax can be a straightforward process if you understand the steps involved. Whether you’re checking your employer’s calculations or preparing to file your taxes independently, here’s what you need to know.

The Basic Formula

To manually compute your income tax, you can use the following formula:

Income tax due = (Taxable income x Tax rate) – Tax withheld

Where:

• Taxable income is your gross income minus any allowable deductions.
• Tax rate is determined by the BIR’s graduated tax table.
• Tax withheld is the amount already deducted from your salary by your employer over the year.

Sample Income Tax Computations for the Taxable Year 2020

Scenario 1: Employee with a Monthly Salary of Php 30,000

1. Calculate the annual salary: Php 30,000 x 12 months = Php 360,000.
2. Compute total annual contributions (employee’s share only):
   • SSS: Php 800 x 12 months = Php 9,600
   • PhilHealth: Php 450 x 12 months = Php 5,400
   • Pag-IBIG: Php 100 x 12 months = Php 1,200
   • Total annual contributions: Php 16,200
3. Determine the taxable income: Php 360,000 (annual salary) – Php 16,200 (contributions) = Php 343,800.
4. Find the applicable tax rate: For a taxable income of Php 343,800, the tax rate is 15% of the excess over Php 250,000.
5. Compute the annual income tax due:
   • Subtract Php 250,000 from the taxable income: Php 343,800 – Php 250,000 = Php 93,800.
   • Multiply the difference by 15%: Php 93,800 x 0.15 = Php 14,070.

If the total tax withheld by the employer matches the income tax due, no additional tax filing is required.

Scenario 2: Employee with a Monthly Salary of Php 100,000

1. Calculate the annual salary: Php 100,000 x 12 months = Php 1,200,000.
2. Account for the taxable portion of the 13th-month pay: Php 100,000 (13th-month pay) – Php 90,000 (tax-exempt portion) = Php 10,000 (taxable portion).
3. Compute total annual contributions (employee’s share only):
   • SSS: Php 800 x 12 months = Php 9,600
   • PhilHealth: Php 900 x 12 months = Php 10,800
   • Pag-IBIG: Php 100 x 12 months = Php 1,200
   • Total annual contributions: Php 21,600
4. Determine the taxable income: Php 1,210,000 (gross income including taxable 13th-month pay) – Php 21,600 (contributions) = Php 1,188,400.
5. Find the applicable tax rate: For a taxable income of Php 1,188,400, the tax rate is Php 102,500 plus 25% of the excess over Php 800,000.
6. Compute the annual income tax due:
   • Subtract Php 800,000 from the taxable income: Php 1,188,400 – Php 800,000 = Php 388,400.
   • Multiply the difference by 25%: Php 388,400 x 0.25 = Php 97,100.
   • Add Php 102,500: Php 97,100 + Php 102,500 = Php 199,600.

The employer should have withheld Php 16,633.33 per month. If the total tax withheld matches the annual tax due, the employee does not need to file an ITR.

Scenario 3: Freelance Web Developer with Gross Receipts of Php 840,000

1. Determine the standard deduction: Php 840,000 (gross receipts) x 0.40 (OSD rate) = Php 336,000.
2. Calculate the taxable income: Php 840,000 (gross receipts) – Php 336,000 (OSD) = Php 504,000.
3. Find the applicable tax rate: For a taxable income of Php 504,000, the tax rate is Php 22,500 plus 20% of the excess over Php 400,000.
4. Compute the annual income tax due:
   • Subtract Php 400,000 from the taxable income: Php 504,000 – Php 400,000 = Php 104,000.
   • Multiply the difference by 20%: Php 104,000 x 0.20 = Php 20,800.
   • Add Php 22,500: Php 20,800 + Php 22,500 = Php 43,300.

The freelancer must declare Php 43,300 as income tax due when filing the ITR.

Remember: These are simplified scenarios to illustrate the computation process. Actual tax calculations may involve additional factors and considerations. Always consult with a tax professional or refer to the latest BIR guidelines for the most accurate information.

Frequently Asked Questions

1. How Do I Decide Between Itemized Deduction and Optional Standard Deduction?

When you’re preparing to file your first quarterly Income Tax Return (ITR), one of the key decisions you’ll face is whether to opt for itemized deductions or the optional standard deduction (OSD). This choice is significant because it will apply to the entire tax year and cannot be altered until the next tax year begins.

What Are the Advantages and Disadvantages of Itemized Deduction?

Advantages:

• Potential for Higher Deductions: If you have substantial business expenses, itemized deductions can lead to greater tax savings, provided you have the necessary supporting documents.
• Control Over Taxable Income: By collecting receipts, invoices, and other documents, you can potentially reduce your taxable income.
• No Tax on Losses: If your business operates at a loss during the taxable year, you won’t owe any income tax.

Disadvantages:

• Intensive Record-Keeping: You’re required to list every business expense and keep receipts for up to 10 years, which can be quite laborious.
• Need for Accuracy: It’s essential to audit your records carefully to prevent mistakes in your tax computation.
• Possible Additional Costs: If you don’t want to handle the record-keeping yourself, or if your gross annual sales exceed Php 3 million, you’ll need to hire a certified public accountant (CPA), which can be an additional expense.

What Are the Advantages and Disadvantages of Optional Standard Deduction (OSD)?

Advantages:

• Simplicity in Computation: The OSD is a fixed 40% of your gross sales or receipts, making it easier to calculate than itemized deductions.
• Predictable Tax Due: You’ll know that 60% of your gross sales or receipts will be subject to tax.
• Less Record-Keeping: While you still need to maintain records of business expenses, there’s no need for detailed tracking and computing.
• Fewer Filing Requirements: You won’t have to submit the BIR Form 1701 AIF or Financial Statements.
• No CPA Requirement: There’s no obligation to hire a CPA for tax filing.
• Lower Audit Risk: OSD filers are less likely to be audited by the BIR.

Disadvantages:

• Potentially Higher Tax Due: If your expenses are greater than your income, you might end up paying more tax than with itemized deductions.
• Tax on Gross Income: Regardless of profit, 60% of your gross sales or receipts will be taxed.
• Tax on Losses: You’re still required to pay income tax even if your business incurs losses during the year.

Which Deduction Method Is Better for Me?

Itemized Deduction: This method is beneficial if you can maintain comprehensive records of your business expenses and these expenses exceed 40% of your gross receipts or sales. It’s also the only option for non-resident foreigners with business income in the Philippines.

Optional Standard Deduction (OSD): OSD might be the right choice for you if:

• Your business expenses are typically less than 40% of your gross sales or receipts.
• You prefer a simpler tax computation process and want to minimize the chances of being audited.
• You’re not confident in your ability to keep accurate financial records.
• You’re a freelancer with irregular business expenses.

Key Consideration: Your individual circumstances will greatly influence which method is more advantageous. It’s important to carefully evaluate your business expenses, record-keeping abilities, and the potential tax implications before making a decision. If you’re unsure, consulting with a tax professional can provide clarity and help you make the best choice for your situation.

2. What Is Minimum Corporate Income Tax (MCIT) and How Is It Computed?

The Minimum Corporate Income Tax (MCIT) is a tax mechanism in the Philippines designed to collect a minimum amount of corporate tax from companies that are paying less than a certain percentage of their gross income as regular corporate income tax (RCIT). This ensures that all profit-earning corporations contribute a minimum amount of tax to the government.

When Is a Corporation Subject to MCIT?

A corporation becomes subject to MCIT when:

1. The RCIT payable is less than the MCIT.
2. The corporation has been in operation for more than four years, counting from the year following the start of its business operations.

How to Compute MCIT

To calculate MCIT, follow these steps:

1. Determine Gross Income:
   • Start with your net sales or revenue.
   • Subtract any discounts, returns, or allowances to find the gross income.
2. Calculate Cost of Sales or Services:
   • For trading or merchandising concerns, include the invoice cost of goods sold, import duties, freight, insurance, and other costs to bring the goods to the place of sale.
   • For manufacturing concerns, include all costs of producing finished goods like raw materials, direct labor, manufacturing overhead, freight, insurance, and other costs to bring the raw materials to the factory or warehouse.
   • For service providers, gross income means gross receipts minus sales returns, allowances, and discounts.
3. Apply the MCIT Rate: The MCIT rate is 2% of the gross income.

Sample Computation of MCIT

Let’s say XYZ Corporation is in its 10th year of business. Here’s a simplified income statement:

• Net Sales: 100,000,000
• Less: Cost of Sales: 20,000,000
• Equals: Gross Income: 80,000,000
• Less: Itemized Deductions: 75,000,000
• Equals: Taxable Income: 5,000,000

The RCIT would be 30% of the taxable income, which is 1,500,000 (5,000,000 * 0.3). The MCIT would be 2% of the gross income, which is 1,600,000 (80,000,000 * 0.02). Since the MCIT is higher than the RCIT, XYZ Corporation would pay the MCIT of 1,600,000 for the current taxable year.

When Does MCIT Start for a Corporation?

A corporation is liable for MCIT starting from the fourth year immediately following the year it commenced operations. For example, if a company began operations in 2016, it would be liable for MCIT from 2020 onwards, provided the MCIT is higher than the RCIT.

When to Pay MCIT?

MCIT should be paid whenever it exceeds the RCIT. The computation is done quarterly on a cumulative basis, meaning income and expenses from previous quarters are included in the current quarter’s calculation.

Carry-Forward Provision of MCIT

If the MCIT paid in a year exceeds the RCIT, the excess can be carried forward and credited against the RCIT for the next three years, provided that in those years, the RCIT is higher than the MCIT.

Suspension of MCIT

The Secretary of Finance may suspend the imposition of MCIT for a corporation if it suffers losses due to prolonged labor disputes, force majeure, or legitimate business reverses.

Which Corporations Are Not Subject to MCIT?

Certain types of corporations are exempt from MCIT, including:

• Proprietary educational institutions and non-profit hospitals subject to a 10% tax.
• Depository banks and offshore banking units with specific tax exemptions.
• International carriers with a 2.5% tax on Gross Philippine Billings.
• Regional Operating Headquarters (ROHQs) taxed at 10%.
• PEZA-registered and BOI-registered entities with income subject to preferential tax treatments.
• Real Estate Investment Trusts (REITs) are subject to RCIT but not MCIT.

Note: The MCIT rate was temporarily reduced to 1% from July 1, 2020, to June 30, 2023, due to the COVID-19 pandemic, after which it will revert to 2%.

Understanding MCIT is crucial for corporations to ensure compliance with tax regulations and to make informed financial decisions. If you’re uncertain about how MCIT applies to your corporation, it’s advisable to consult with a tax professional.