3 legal ways NOT to pay taxes to BIR
As taxpayers, we want to reduce our taxes to save more profits to invest in our business operations. However, some used illegal schemes to reduce or not pay taxes at all to the government through the Bureau of Internal Revenue (BIR). What if there are legal ways, as expressly provided by our law, which allow taxpayers to pay zero taxes without committing tax evasion in the Philippines?
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The New 8% Income Tax Rate (ITR) Option
Under R.A. No. 10963, otherwise known as TRAIN Law, which took effect on January 1, 2018, individual taxpayers who are qualified and availed of the new 8% ITR option are exempted from paying quarterly three percent (3%) percentage tax to the BIR. Taxpayers will pay only equivalent to 8% of their taxable income. The computation of taxable income subject to an 8% income tax depends on the sources of income of individual taxpayers. The tables below summarize the computation for each type of individual taxpayer:
Purely self-employed individuals/professionals
The above computation table is for the individuals and professionals who are earning purely their income from the conduct of business, trade, or practice of the profession. In other words, they do not have income from employment under an employer-employee relationship during the same year of availing 8% ITR option.
Mixed-income earners who are individuals/professionals
The above table is for the mixed-income earners who are earning from the conduct of their business, trade, or profession AND employment under an employer-employee relationship during the same year of availing 8% ITR option. Take note, the computation of tax due under the 8% ITR option for mixed-income earners should not include compensation income from employment.
Notice the main difference between the above computation tables of PURELY and MIXED EARNERS. PURELY earners have P250,000 deductions from gross income every quarter and annually but MIXED earners have none.
The BMBE Law
Passed into law in the year 2002, R.A. No. 9178, otherwise known as BMBE Law, granted incentives and other benefits to micro-enterprises in the Philippines. One of the incentives is income tax exemption from the BIR for two (2) years. Before applying for income tax exemption in the BIR, you must apply first for the BMBE Certificate of Authority as proof that you are qualified under the law. One important qualification requirement is that your business assets, excluding land, should not be more than P3,000,000.
As to the application for income tax exemption for two (2) years in the BIR, the following are the documentary requirements to be submitted:
- Copy of the BMBE’s Certificate of Authority
- Sworn Statement of Assets of the BMBE and/or its affiliates, supported by pertinent documents
- Certified list of branches, sales outlets, places of production, warehouses, and storage facilities
- Certified list of affiliates
- Latest audited Financial Statement or Account Information Form or its equivalent
The 2-year income tax exemption is renewable for another two (2) years as long as the taxpayers, as micro-enterprises, are qualified BMBE. However, taxpayers are still required to submit annual income tax returns to the BIR and other applicable tax returns as registered in the Certificate of Registration.
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The Value-Added Tax Exemption
Sec. 109 of the 1997 Tax Code, as amended, lists the transactions which are exempted from 12% Value-Added Tax (VAT). VAT exemption means the taxpayers are not liable to pay 12% VAT to the BIR because of these transactions. One VAT-exempt transaction is the sale or importation of agricultural and marine food products in their original state under Sec. 109 (A) of the same law. Examples are fruits, vegetables, fish, and meat. Unlike unlawful use of ghost receipts/invoices to reduce the VAT due, these VAT exemptions are clearly and expressly allowed by the law.
More importantly, these VAT-exempt transactions are not included in the computation of the new P3,000,000 VAT threshold under Sec. 236 of the 1997 Tax Code, as amended. This means that even if your annual sales of agricultural and marine food products, for example, exceed P3,000,000, you are not liable to register VAT in your Certificate of Registration. Hence, you are not required to update your BIR registration to include VAT in your tax type.
Also worth noting is that another tax benefit of VAT exemption is the exemption from a three percent (3%) quarterly percentage tax under Sec. 116 of the same law. In other words, if your business is selling fruits, vegetables, fish, and/or meat, as our examples, you are exempted from the following:
- 12% VAT, regardless of the amount of your annual sales.
- VAT Registration
- 3% Percentage Tax
But you are still liable to income tax, whether individual or non-individual taxpayer. However, you may avail of the income tax exemption for two (2) years in the BIR through BMBE as earlier explained and discussed above.
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Learn more about BIR tax compliance for MSMEs
We would like to invite you to our RWB Books, with exclusive ATC online tutorial videos to explain and discuss its contents, and to learn more about how to comply with the BIR tax compliance. Kindly click the photo below to learn more about each of these RWB Books.
