Taxes are essential to running a business or earning income in the Philippines, but they can be complex. This guide breaks down the four key tax types: Value-Added Tax (VAT), Percentage Tax, Withholding Tax, and Income Tax. Whether you’re self-employed, running a small business, or earning mixed-income, we’ll help you understand how these taxes work and how to compute them with practical examples.
What is Value-Added Tax (VAT)?
Value-Added Tax (VAT) is an indirect tax applied to the sale of goods, services, or properties. Businesses collect VAT from their customers and remit it to the Bureau of Internal Revenue (BIR).
– VAT Rate: 12%.
– Who Pays VAT? Businesses earning more than ₱3 million annually must register as VAT taxpayers.
Example:
If you sell a product for ₱50,000, you’ll add ₱6,000 in VAT (₱50,000 x 12%), making the total price ₱56,000. The ₱6,000 is collected from the customer and remitted to the BIR.
Businesses can also claim input VAT—the VAT paid on business-related purchases—against their output VAT to reduce the tax amount they owe.
What is Percentage Tax?
For businesses earning ₱3 million or less annually, Percentage Tax applies instead of VAT.
– Percentage Tax Rate: 1% under the TRAIN Law (effective until 2025).
– Who Pays Percentage Tax? Non-VAT-registered businesses earning below the ₱3 million threshold.
Example:
If your gross monthly sales are ₱150,000, your percentage tax is ₱1,500 (₱150,000 x 1%). This tax is filed quarterly using BIR Form 2551Q.
What is Withholding Tax?
Withholding Tax ensures taxes are collected at the source. There are three main types:
1. Withholding Tax on Compensation: Deducted from employees’ salaries by employers.
2. Expanded Withholding Tax (EWT): Deducted from payments to suppliers, contractors, or professionals. Rates are determined by the Expanded Withholding Tax Table.
3. Final Withholding Tax: Applied to specific types of income, such as dividends or interest.
Example for EWT:
If you pay a contractor ₱50,000, and the withholding rate is 10%, you’ll deduct ₱5,000 and remit it to the BIR. The contractor receives ₱45,000, and the ₱5,000 is credited to their tax liability.
The EWT table provides specific rates depending on the nature of the transaction. Always refer to it for accurate computations.
What is Income Tax?
Income Tax is imposed on earnings and applies to both individuals and businesses.
Annual income:
• Not over PhP250,000.00 – None (zero percent)
• Over PhP250,000.00, but not over PhP400,000.00 – 15 percent of excess over
PhP250,000.00
• Over PhP400,000.00, but not over PhP800,000.00 – PhP22,500.00 plus 20
percent of excess over PhP400,000.00
• Over PhP800,000.00, but not over PhP2,000,000.00 – PhP102,500.00 plus 25
percent of excess over PhP800,000.00
• Over PhP2,000,000.00, but not over PhP8,000,000.00 – PhP402,500.00 plus 30
percent of excess over PhP2,000,000.00
• Over PhP8,000,000.00 – PhP2,202,500.00 plus 35 percent of the excess over
PhP8,000,000.00
Example Computation
Scenario:
– Gross income: ₱800,000
– Expenses: ₱200,000
– Taxable income: ₱600,000
Computation:
- Base tax – P22,500 (for income over P400,000)
- Excess income – P600,000 – P400,000 – P200,000
- Tax on excess – P200,000 x 20% = P40,000
- Total tax payable = P22,500 + P40,000 = P62,500
Income Tax Payable: ₱62,500
Optional Deductions and 8% Flat Tax Rate
1. OSD (Optional Standard Deduction):
– Deduct 40% of gross income instead of itemizing expenses.
– Example: Gross income = ₱800,000
– OSD = ₱800,000 x 40% = ₱320,000
– Taxable income = ₱800,000 – ₱320,000 = ₱480,000
– Apply the graduated tax table for further computation.
2. 8% Flat Tax Rate:
– Available for individuals and businesses earning ₱3 million or less annually.
– Example: Gross income = ₱800,000
– Tax payable = ₱800,000 x 8% = ₱64,000
This option simplifies tax computation and replaces both income tax and percentage tax.
Options for Mixed-Income Earners
Mixed-income earners—those earning from both compensation (as an employee) and business income—file taxes separately for each:
1. Compensation Income: Taxed under the graduated income tax table.
2. Business Income: Eligible for itemized deductions, OSD, or the 8% flat tax rate.
Example:
– Compensation income: ₱400,000
– Business income: ₱600,000
Compensation income is taxed per the graduated table, while business income offers flexibility in applying deductions or opting for the flat tax rate.
Conclusion: Simplify Your Taxes
Understanding VAT, Percentage Tax, Withholding Tax, and Income Tax helps you stay compliant and make informed financial decisions. Whether you’re choosing between VAT or Percentage Tax, calculating deductions, or opting for the 8% flat tax, knowing your options is key.
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FAQs About Taxes in the Philippines
1. Who is required to pay VAT?
Businesses earning over ₱3 million annually.
2. What is the difference between VAT and Percentage Tax?
VAT is for businesses earning above ₱3 million, while Percentage Tax applies to those earning ₱3 million or less.
3. How often do I need to file taxes?
VAT and Percentage Tax are filed quarterly, while income tax is filed annually.
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