RR No. 8-2018 — Implements the amended provisions on Income Tax pursuant to RA No. 10963 (TRAIN Law) (Published in Manila Bulletin on February 22, 2018) Digest | Full Text

ffiNll. y:'' i.w'o BnTEBBAcTonvI BEIS{IIE RIPUBLlC OI- TI-]E PHILIPPINES FEB 2o torE/+ D!,PARTIV{ENT OF FINANC]E fJNVq, BUREAU OF INTERNAL RE\IENUE RECEIVED .\l Quezon City January 25,2018 t I REVENUE REGULATI'NS No. g'2Ol I / I SUBJECT Implementing the Income Tax Provisions of Republic Act No. TO 10963, Otherwise Known as the "Tax Reform for Acceleration and Inclusion (TRAIN)" Act All Internal Revenue Officers and Other Concerned SECTION 1. SCOPE. - Pursuant to Section 244 of the National Internal Revenue Code, as amended, and Section 84 of Repubiic Act (R.A.) No. 10963 otherwise known as the "Tax Refoln for Acceleration and Inclusion (TRAIN)" Law, these regulations are hereby promulgated to implement the amended provisions on Title Ii - Tax on Income of the NIRC. SECTION 2. DEFINITION OF TERMS. - Words and/or phrases used under these regulations shall mean: a. Compensation Income - in general, nteans all remunelation for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code. The name by which the remuneration for services is designated is immaterial. Tirus, salaries, wages, emoluments and honoraria, allowances, commissions (e.g. transpofiation, replesentation, entefiainment and the like); fees including director's fees, if the director is, at the same time, an employee of the employericotporation; taxable bonuses and fringe benefits, except those which are subject to the fringe benefits tax under Sec. 33 of the Code and the allowable "de minimis" benefits; taxable pensions and retirement pa-v; and other income of a similar nature constitute compensation iucome. b. Compensation Income Earners - individuals whose sollrce of income is purely delived fi'om an employer-employee relationship' c. Emplcyee an individual performing serrrices under an emp1o1,er-ernployee relationship. The term covers all employees, including officers and employees, whether elected or appointed, of the Government of the Philippines, or any political subdivision thereof or any agency or instlumentality. d. Employer - any person for whom an individual performs or perlormed any service,,of whatever nature. under an employer-employ'ee relationship. It is not necessary that the services be continuing at the time the wages are paid in order that the status of \r \!: employer may gxist. Thus, for purposes of r,vithholding, a person for whom an \l

individual has performed past services and from whom he is still receiving compensation is an "emPloYer". Employer and Employee Relationship - exists when a person for whom services were periormed (employer) has the right to control and direct an individual who performs ihe services (empioyee), not only as to the result of the work to be accomplished but also as to the detaili, methods and means by which it is accomplished. An employee is subject to the control of the employer not only as to what shall be done, bit how it shall be done. It is not necessary that the employer actualiy exercises the right to direct or control the manner in which the services are performed. It is sufficient that there exists a right to control the manner of doing the work. f. Fringe Benefits - means any good, service or other benefit furnished or granted in cash or in i<ina other than the basic compensation, by an employer to an individual employee (except rank and file empioyee as defined herein) such as, but not limited to the following: 1. Housing; 2. Expense account; 3. Vehicle of any kind; 4. Household personnel, such as maid, driver and others; 5. Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; 6. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; 7. Expenses for foreign travel; 8. Hoiiday and vacation expenses; g. Education assistance to the employee or his dependents; and 10. Life or health insurance and other non-life insurance premiurns cr similar amounts in excess of what the law allows. g. Gross Receipts -coremfepresntsoattihoen,tostaelrvaimceoufneteo, fremnotanel yororroitysaeltqyu,ivianlcelnutdrinegprethseentainmgouthnet contract priie, charged for materials supplied with the services, and deposits and advance payments actually or constructively received during the taxable period for the services performed or to bi performed for another person, except returnable security deposits for purposes of these regulations. In the case of VAT taxpayer, this shall exclude the VAT component. h. Gross Sales - refers to the totai sales transactions net of VAT, if applicable, reported deductions: during the period, without any other deduction. However, gross sales subject to the 8% incoJe tax rate option shall be net of the following \ pz. , t-1 \' 4:ea !R,tlBCs0uRo4?$rltrERMr REVENTJE 2 127 ryrG r-P. i.rtfut?:t.lO--il' FEB 2 0 z0tE . |-t U*i;-;"'t &RI;'ruE'iE'-f*1jE"/\'F- \rl-iF-I-&*E.-J ,. E /i -- -ij

1. Sales returns and allowances for which a proper credit or refund was made during the month or quarter to the buyer for sales previously recorded as taxable saies; and 2. Discounts determined and granted at the time of sale, which are expressiy indicated in the invoice, the amount thereof forming part of the gross sales duly recorded in the books of accounts. Sales discount indicated in the invoice at the time of sale, the grant of which is not dependent upon the happening of a future event, may be exciuded from the gross saies within the same monthiquarter it was given. Minimum Wage Earner (MWE)- refers to a worker in the private sector who is paid with a .tututory minimum wage (SMW) rates, or to an employee in the public sector with compensition income of not more than the statutory minimum wage rates in the non-agricultural sector where the workeriemployee is assigned. Such statutory minimum wage rates are exempted from income tax. Likewise, the exemption covers the holidal,pay, overtime pay, night shift differential pay, and hazard pay earned by an MWE. j Mixed Income Earner - an individual earning compensation income from employment, and income from business, practice of profession and/or other sources aside from employment. t, Non-resident alien engaged in trade and business QTIRAETB) - refers to a non-resident alien who shall comelo the Philippines and stay for an aggregate period of more than one hundred eighty (i80) days during any calendaryeat' l. Non-resident alien not engaged in trade and business Q'{RANETB) - refers to a non- resident alien who shall come to the Philippines and stay for an aggregate period of one hundred eighty (180) days or less during any caiendar year' - m. Rank and File Employee refers to an employee holding neither managerial nor supervisory position as defined under existing provisions of the Labor Code of the Phiiippines, as amended. - n. Self-employed a sole proprietor or an independent contractor who reports income earned from self-employment. S/he controls who sihe works for, how the work is done and when it is done. lt includes those hired under a contract of service or job order, and professionals whose income is derived purely from the practice of profession and not under an employer - employee relationship' professional- a person formally certified by a professional body beionging to a specific profession b1, virtue of having compieted a required examination or course of studies and/or practice, whose competence can usually be measured against an established set of standards. It also refers to a person who engages in some afi or sport for money, as a means of liveiihood, rarher than as a hobby. lt inoludes but is noi lirnited to doctors, lawyers, engineers, architects, CPAs, professionai entertainers, artists, professional athletes, directors, producers, insurance agents, insurance adjusters, management and recipients technical consultants, bookkeeping agents, and other of professional, vl/{ promotional and talent fees. -/ BlnrAI/ or filEniw BEvENUn \\N7f , tsEc0iqrs 5tfr56r.Fo'trav'lsloN 4: FEB 2 0 2016 RE C EIY 3 127

o. Taxable Income - refers to the pertinent items of gross income specified in the Code, less deductions, if any, authorized for such types of income by the Code or other special 1aws. p. VAT Threshoid - refers to the ceiiing fixed by law to determine VAT registrable taxpayers. The VAT threshold is currentiy set at three million pesos (P3,000,000.00). and the same shall be used to determine the income tax liability of self-employed individuals and/or professionals under Sections 24(AX2Xb) and 24(A)(2)(c)(2) of the Tax Code, as amended. SECTION 3. INDIVIDUAL CITIZEN AND INDIVIDUAL RESIDENT ALIEN OF TTIE pHILIPPINES. - In general, the income tax on the individual's taxable income shall be computed based on the following scheduies as provided under Sec. 24(A)(2Xa) of the Tax Code, as amended: - (A) Income Tax Rates. Effective January 1, 2018 until December 31, 2022: RANGE OF TAXABLE TAXDUE=s+(bxc) INCOME BASIC ADDTTIONAL OF EXCESS AMOUNT OVER NOT OVER RATE OVER (a) (b) (c) 250.000.00 250,000.00 30.000.00 20% 250.000.00 400.000.00 400,000.00 130,000.00 400,000.00 800,000.00 800,000.00 490.000.00 25o/o 800,000.00 2.000.000.00 2,000,000.00 2,410,000.00 2,000,000.00 8,000,000.00 8,000,000.00 30% 9,000,000.00 32V, 3s% Effective January 1,2023 and onwards: RANGE OF TAXABLE TAXDUE=s+(bxc) INCOME BASIC ADDITIONAL OF EXCESS AMOUNT OVER NOT OVER RATE OVER (a) (b) (c) 250,000.00 250.000.00 22,500.00 15% 250.000.00 400.000.00 400.000.00 102,500.00 20% 400.000.00 800.000.00 800.000.00 402,500.00 25% 800.000.00 2,000,000.00 2.000.000.00 30% 2,000,000.00 8,000,000.00 8,000,000.00 1 lat' <nn nn 35% 8,000,000.00 (B) Inrlivicluals Eurning Purely Compensation Income. - lndividuais earning purely compensation income shali be taxed based on the income tax rates prescribed under c' subsection (A) hereof. F +:55,?'MFE' VENUE Vr' t BIntAfi ol I}ffiRHAL Rf 3 , qDS MGE &!r?3lotl e0[ FEB e0 i-t RECE Wffi 4 127

Taxable income for compensation earners is the gross compensation income less non- taxable income/benefits such as but not limited to the Thirleenth (13th) month pay and other benefits (subject to limitations, see Section 6(G)(e) of these Regulations), de minimis benefits, and employee's share in the SSS, GSIS, PHIC, Pag-ibig contributions and union dues. Husband and wife shall compute their individual income tax separately based on their respective taxable income; if any income cannot be definitely attributed to or identified u. in"o*. exclusiveiy earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income. Minimum wage eamers shall be exempt from the payment of income tax based on their statutory minimum wage rates. The hoiiday pay, overtime pay, night shift differential pay and hazard pay received by such earner are likewise exempt. Illustration 1: Mr. CSO, a minimum wage eamer, works for G.O.D., lnc' He is not engaged in business nor has any other source of income other than his empioyment. For 2018, Mr. CSO earned a total compensation income of P 135,000.00. a. The taxpayer contributed to the SSS, Philhealth, and HDMF amounting to P5,000.00 and has received 13th month pay of P11,000.00. His income tax liability will be computed as follows: Total Compensation lncome P 135,000.00 Iess.' Mandatory contributions P 5,000'00 16.000.00 Non-taxable benefits 11.000.00 P 119.000.00 Taxable income *Taxpayer is exempt since he is considered a minimum income earnef. b. The following year, Mr. CSO earned, aside from his basic wage, additional pay of P140,000.00 which consists of the overtime pay- P80,000.00, night shift differential- F30,000'00, hazard pay- P15.000.00. and holiday pay- Pl5,000.00. He has the same benefits and contributlons as above. Total Compensation Income P 135,000.00 Add; Overtime. night shift differential, hazard, and holiday paY 140.000.00 P 275.000.00 Total lncome Iess.' Mandatory contributions ? 5,000.00 Non-taxable benefits 1 1.000.00 16.00C.C0 Net taxable income F 259.000.00 Tax due EXEMEI * Taxpayer is tax exempt as an MWE. The statutory minimum wage \\ill/ " as well as the holiday pay, overtime pay. night shift differential pay and hazard pay' received by such MWE are specificail,v exempted from income tax under the iaw. :55 BnTtJBc?o}TNNt?sIImIIIEcir\.ALDIBWESVEIO{IINN 5 127 $ P. t,i . FEB 2o zolE !o*1'l"ol-t--:;:,a $L- i '-h\ l {r.'H'1' 1ht -\.jf TtTs.. F!.[ .A,rl "i*: lEF ,fs 4r

(C) Self-Emptoyecl Indivicluals Earning Income Purely from Self-Employment or Practice of Profession. - Individuals earning income purely from self-employment and/or practice of profession whose gross sales/receipts and other non-operating income does not exceed the value-added tax (VAT) threshold as provided under Section 109 (BB) of the Tax Code, as amended, shal1 have the option to avail of: 1. The graduated rates under Section 2a($Q)@) of the Tax Code, as amended; OR 2. An eight percent (8%) tax on gross sales or receipts and other non- operating income in excess of fwo hundred fifty thousand pesos (P250,000.00) in lieu of the graduated income tax rates under Section 24(A) and the percentage tax under Section 1 16 all under the Tax Code, as amended. Unless the taxpayer signifies the intention to elect the 8%o income tax rate in the i't Quafter Percentage andlor lncome Tax Return, or on the initial quarter return of the taxable year after the commencement of a new businessipractice of profession, the taxpayer shall be considered as having availed of the graduated rates under Section Za@)Q)@) of the Tax Code, as amended. Such election shall be irrevocable and no amendment of option shall be made for the said taxable year. The option to be taxed al \oh income tax rate is not available to a VAT-registered taxpayer, regardless of the amount of gross salesireceipts, and to a taxpayer who is subject to Other Percentage Taxes under Title V of the Tax Code, as amended, except those subject under Section 116 of the same Title. Likewise, partners of a General Professional Partnership (GPP) by virtue of their distributive share from GPP which is already net of cost and expenses cannot avail of the 8olo income tax rate option' A taxpayer who signifies the intention to avail of the 8%o income tax rate option, and is conclusively qualified for said option at the end of the taxabie year fannual gross sales/receipts and other non-operating income did not exceed the VAT threshoid (F3,000,000.00)1. shall compute the final annual income tax due based on the actual annual gross sales/receipts and other non-operating income. The said income tax due shall be in lieu ofthe graduated rates of income tax and the percentage tax under Sec. 116 of the Tax Code, as amended. The Financial Statements (FS) is not required to be attached in fiiing the final income tax return. However, existing rules and regulations on bookkeeping and invoicingireceipting shall still apply. A taxpayer shall automatically be subject to the graduated rates under Section 2a(A)(2)(a) of the Tax Code, as amended, even if the flat 8oZ income tax rate option is initialiy selected, when taxpayer's gross sales/receipts and other non-operating income exceeded the VAT thresholcl during the taxable year. In such case, his income tax shall be computed under the graduated income tax rates and shall be allowed a tax credit for the previous quarter/s income tax payment/s under the 8oh income tax rate option. ln addition, a taxpayer subject to the graduated income tax rates (either selected this as the income rax regime. or failed to signify chosen intention or failed to qualifu to be taxed , F \, atthe 89| income tax rate)'8is also subject to the applicable business tax, if any, Subject to\S ' the provisions of Section of these Regulations, an FS shall be required as an attachment BIN'A-U O? F{IEN\AL IEVEflJN R' EEAADcSl:Ms 65f, OTV]SION 6 127 P.ta . FEB2ozolE nl{,,^ ' / " q,?"- I; i.i'{'*'! r\!-F Lr Fl i} ,*.k- &s atd b4 '&' ' "E *

to the annual income tax return even if the gross sales/receipts and other non-operating income is less than the VAT threshold. However, the annual income tax return of a taxpayer with gross sales/receipts and other non-operating income of more than the said VAT threshold shall be accompanied by an audited FS. Taxable income for individuais earning income from self-employment/practice of profession shall be the net income, iftaxpayer opted to be taxed at graduated rates or has failed to signify the chosen option. However, if the option avaiied is the 8% income tax rate, the taxable base is the gross sales/receipts and other non-operating income. Illustration 2; Ms. EBQ operates a convenience store while she offers bookkeeping services to her clients. In 2018, her gross sales amounted to P800,000.00, in addition to her receipts from bookkeeping services of P300,000.00. She already signified her intention to be taxed at 80% income tax rate in her 1't quarter return. Her income tax liability for the year will be computed as follows: Gross Saies - Convenience Store P 800,000.00 Gross Receipts - Bookkeeping 300.000.00 Total Sales/Receipts F 1,100,000.00 Iess: Amount allowed as deduction under Sec. 24(A)(2)(b) 2s0.000.00 Taxable lncome P __850-000.00 Tax Due: P__6&000-00 8% of P850,000.00 * The total of gross sales and gross receipts is below the VAT threshold of P3,000,000.00, Taxpayer's source of income is purely from self-employment, thus she is entitled to the amount allowed as deduction of P250,000.00 under Sec. 24(AX2Xb) of the Tax Code, as amended. * lncome tax imposed herein is based on the total of gross sales and gross receipts. x Income tax payment is in lieu of the graduated income tax rates under subsection (A) hereof and percentage tax due, by express provision of law. Illustration 3: Ms. EBQ above, failed to signifi' her intention to be taxed at 8%o income tax rate on gross saies in her initial Quarterly lncome Tax Return, and she incurrecl cost of sales and operaiing expenses amounting to P5C0,000.00 anC P200,000.00, respectively, or a total of P800,000.00, the income tax shall be computed as follows: Gross Sales/Receipts P 1,100,000.00 a- Iess.' Cost of Saies Gross income 600.000.00 \N Less ; Operating Expenses P 500.000.00 200.000.00 BIn?A.n 6p gltliiliAl BEvE{uE q{,,,, .nf,eaFos ''tuvq,-cva,-f, olrzsror tl .U, n. 'f o FEB z zolE ll Jl i.. r':t .' t '. F, l" fi r- E T ',; tr' t Y, ,1 .L,

Taxable Income F _ 300_000-00 Tax Due: P _10-000.00 On excess (P300,000 - P250,000) x20o/o * Aside from income tax, Ms. EBQ is likewise liable to pay business tax. Illustration 4: Mr. JMLH signified his intention to be taxed at 8%o income tax rate on gross sales in his I't Quafter lncome Tax Retum. He has no other source of income, His total saies for the first three (3) quarters amounted to P3,000,000.00 with 4th quarter sales of P3,500,000.00. Total Sales 1st Quarter 2nd Quarter 3'd Quarter 4th Quarter Iess.' Cost of Sales (8% Rate) (8% Rate) Gross Income P P 500,000.00 500,000.00 (8% Rate) Zess.'Operating 300.000.00 300,000.00 P P 2,000,000.00 3.500,000.00 Expenses Taxable Income P P 200,000.00 200,000.00 1,200,000.00 1 ,200,000.00 P P 800,000.00 2,300,000.00 120,000.00 120,000.00 480,000.00 720,000.00 P P P P 80.000.00 80.000.00 320 000.00 1-580.000.00 Tax due shall be computed as foilows: F 6,500,000.00 Total Sales 3.000"000.00 Zess. Cost of Saies Gross Income P 3,500,000.00 Less : Operating Expenses Taxable Income 1"440.000.00 P_2J60,000.00 Income Tax Due P 509,200.00 Tax Due under the graduated rates 220"000.00 P__ 289200-00 Less:8Yo income tax previously paid (Q1 to Q3) (F3,000,000.00 - P250,000.00) x 8% Annual Income Tax Payable * The gross receipts exceeded the VAT threshold of P3,000,000.00. Taxpayer shall be liable to pay income tax under graduated rates pursuant to Section 2a@)(2)(a) of the Tax Code, as amended. * Taxpayer shall be allowed an income tax credit of quarterly payments initially made under the 8oh income tax option computed net of the allowable deduction of P250,000.00 granted for purely business income. * Taxpayer is likewise iiable for business tax(es), in adCition to income tax. For this purpose, the taxpayer is required to update his registration from non-VAT to VAT taxpayer. Percentage tax pursuant to Section 1 16 of the Tax Code, as amended, shall be imposed from the beginning of the year untiltaxpayer is iiable to VAT. VAT shall be imposed prospectively. \ J BnIfIAEuar.nuOOSpefN-r:nE6CIl.X5.i'ADtf,Butv,E?VSElOr'tNiE V*fr .,'- -RECEIV FEB 2 O zOtE 8 127

* Percentage tax due on the non-VAT portion of the sales/receipts shall be collected without penalty, if timely paid on the due date immediately fotlowing the month/quarter when taxpayer ceases to be a non-VAT. Illustration 5: Ms. RPSV is a prominent independent contractor who offers architectural and engineering services. Since her career flourished, her total gross receipts amounted to P4,250,000.00 for taxable year 2018. Her recorded cost of service and operating expenses were P2,150,000.00 and F1,000,000.00, respectively. Her income tax liability will be computed as follows: - Gross Receipts (Architectural and Engineering Services) P 4,250,000.00 2.1s0.000.00 Zess.' Cost of Service Gross lncome P 2,100,000.00 Zess.' Operating Expenses 1.000.000.00 Taxable lncome P_1J00-000-00 Tax Due: P 130,000.00 On P800,000.00 90.000.00 On excess (P1,100,000.00 - P800,000.00) x 3o% P_220"zu-00 Income Tax Due * The gross receipts exceeded the VAT threshold of P3,000,000.00; subject to graduated income tax rates; liable for business tax - VAT, in addition to income tax. Illustration 6: In 2018, Mr. GCC owns a nightclub and videoke bar, with gross sales/receipts of P2,500,000.00. His cost of sales and operating expenses are P1"000.000.00 and P600,000.00, respectively, and with non-operating income of P100,000.00. His tax due for 201 8 shall be computed as foliows: P 2,500,000.00 Taxable Income from Business: Gross Sales 1.000.000.00 Iess.' Cost of Sales Gross lncome P 1,500.000.00 Less : C)perating Expenses Net Income from Operation 600.000.00 Add : Non-operating Incorne Taxable Income P 900.000.00 100.000.00 P_]J00J00.00 Tax Due: P 130,000.00 On P800,000.00 On excess (P1,000,000.00 - P800,000.00) x30o/o 60.000.00 Total Income Tax P_ _190J00-00 4:55 BRItIP,otA0sE0rsTm|{rcErB.illrLifBtiISYEloNUNE $, P.u. 9 127 FEB 2 0 20lE [,Ml.{]4-^. RE C EIVE Drz'

* The taxpayer has no option to avail of the 8%o income tax rate on his income from business since his business income is subject to Other Percentage Tax under Section 125 of the Tax Code, as amended' * Aside from income tax, taxpayer is liable to pay the prescribed business tax, which in this case is percentagl tax of 18% on the gross receipts as prescribed under Sec. 125 of the Tax Code, as amended' (D)Intlivitluuls Earning Income Both from Compensation and from Self-employment practice of profession)' mixed income (business or - For earners, the income tax rates applicable are: 1. The compensation income shall be subject to the tax rates prescribed under Section za(NQ)@) of the Tax Code, as amended;AND 2. The income from business or practice of profession shall be subject to the following: a. lf the gross salesireceipts and other non-operating income do not exceed the VAT threshold, the individual has the option to be taxed at: a.1 Graduated income tax rates prescribed under Section 2a(AX2Xa) of the Tax Code, as amended; OR a.2 E\ght percent (8%) income tax rate based on gross sales/receipts and other non-operating income in lieu of the graduated income tax rates and percentage ia, und.. Section 116 of the Tax code, as amended, b. If the gross sales/receipts and other non-operating income exceeds the VAT threshold, the individual shall be subject to the graduated income tax rates prescribed under Section2a@)Q)(a) of the Tax code, as amended' The provision under Section 24(AX2Xb) of the Tax Code, as amended, which allows gross sales/receipts and other non-operating i; "in"'co"im,rei",inofex1cYeosisncoomf eP2t5a0x,0ra0t0e.0o0n available only to pureiy seif-employed individuals and/or professionals. The P250,000.00 mentioned is not applicabie to mixed income earners since it is already incorporated in the first tier of the graduated rates applicable to compensation income. Under the said graduated rates' income tax of the P250,000.00 over the actual taxable compensation income is not the excess deductible against the taxable income from businessipractice of profession under the 8%o income tax rate oPtion. The totaltax due shallbe the sum of: (1) tax due from compensation, computed using the graduated income tax rates; and (2) tax due from self-employment/practice of froflssion, resulting from the multiplication of the 8olo income tax rate with the total of the gross sales/receipts and other non-operating income' the graduated income tax rates for combine the taxable income from ./1/ fVz Mixed income earner who opted to be taxed under u' " income from business/practice of profession' shall EIJI'qU OT ITTTEP.IIAI BSVEIUE nEe6R s t5rc5L fP.l[l,',ttttrtz.stoN ss 4: " FEB 20 20t8 10127 EE',.\ET17 uzL'*2rY'

both compensation and business/practice of profession in computing for the total taxable intome and consequently, the income tax due' Illustration 7: Mr. MAG, a Financial comptroller of JAB Company, earned annual compensation in 201 8 of Pl,500,000.00, inclusive of 13th month and other benefits in the amount of p120,000.00 but net of mandatory contributions to SSS and Philhealth. Aside from employment income, he owns a convenience store, with gross sales of P2,400,000- His cost of sales and operating expenses are F1,000,000.00 and P600,000,00, respectively, and with non-operating income of P100,000.00. a. His tax due for 2018 shali be computed as follows if he opted to be taxed at eight percent (8%) income tax raie on his gross sales for his income from business: income Total compensation P 1'500'000'00 (max) Iess.. Non-taxable 13th month pay and other benefits 90'00q'qQ Income Taxable Compensation P-l-4rc'00000 Tax due: P 130,000.00 1. On ComPensation: I83.000.00 On F800,000.00 P 313.000.00 On excess (P1,410,000 - P800,000) x30%o P 2,400,000.00 100.000.00 Tax due on ComPensation Income 2. On Business Income: P 2,500,000.00 8% Gross Sales Add : N on-oPerating Income P 200.000.00 Taxable Business Income Multiplied bY income tax rate Tax Due on Business Income Total income Tax Due (Compensation and Business) P__r]1s00.00 * Tgfrhroaemdoupabttiueosdninionecfsos8m.%aenintdacoxthrnreaetestsaaxmanreadtiesthiesinappelipreclieucnatobalfgeethotenalxyinutconodtmaexer pStaaeyxcetriuo'snnidn1ec1ro6mthoeef the Tax Code, as amended. * The amount of P250,000.00 allowed as deduction under the law for taxpayers earning solely from self-employmentipyc!9e of profession' is not appli.able for mixed income earner under the 8o% income tax rate oPtion. * The P250,000.00 mentioned above is already incorporated in the first tier ofthegraduatedincometaxratesapplicabletocompensationincome, b. His tax due for 201 8 shall be computed as follows if he did not opt for the (- eight percent (8%) income tax based on gross sales/receipts and other non- \Y, operating income: BTIREAU N? NMENTT NEVEI{UE DrfisIoN R -COAgcsl.tM5r5, F.rt4, ttl27 FEB Z0 Z0tE ti_frou E}Elr^u,TvErr}; +E&.VyLrEV

Total compensation income PaY and other F 1,500,000.00 Non-taxable 13th month Zess.: benefits-max 90.000.00 Taxable ComPensation lncome P 1,410,000.00 - Adct; Taxable lncome from Business P 2,400,000.00 Gross Sales Iess.' Cost of Sales 1.000.000.00 Gross Income P 1,400,000.00 Zess: Operating ExPenses 600.000.00 Net Income from OPeration P 800,000.00 ldd' Non-operating Income 100.000.00 900.000.00 Total Taxable lncome P2i,1_0J00'00 Tax Due: P 490,000.00 On P2,000,000.00 On excess (P2,3 10,000 - 2,000,000) x32% 99.200.00 Total Income Tax P s89.200.00 * The taxable income from both compensation and business shall be combined for purposes of computing the income tax due if the taxpayer chosetobesubjectunderthegraduatedincometaxrates. * in addition to the income tax, Mr. MAG is likewise liable to pay percentagetaxofFT2,000.00,whichis3YoofP2'400'000'00 c. on February 7019,taxpayer tendered his resignation to concenffate on his business. His totai fompensation income amounted to P150,000'00, inciusive of benefits of pZO,OOO.00. His business operations for taxable year 20lgremainsthesame'Heoptedfortheeightpercent(8%)incometaxrate. Total compensation income P 150,000.00 Iess: Non-taxable benefits 20.000.00 Taxable ComPensation Income P 130.000.00 Tax due: P 0.00 1. On Compensation: P 2,400,000.00 On P130,000.00 (not over P250.000'00) 100"000.00 2. On Business Income: P 2,500,000.00 Gross Sales 8% ,4dd.' Non-oPerating Income Taxabie Business Income F 200.000.00 Multiplied bY income tax rate Tax Due on Business Income B ?nn Aon on Total lncome Tax Due (Compensation aild Business) f-=Y!!v\J\/w * The option of 8% income tax rate is applicable only to taxpayer's income is in lieu of the income tax under the from business, and the same Section 116 of the percentage tax under graduated income tax rates and \N\/ - the Tax Code. as amended. ff BUIEAU 0F IllItF,ltAL REVE{UA 11 l)1 ED EI E! Y l:P ,l--i UL

* The amount of F250,000.00 which is aliowed as deduction under the law for taxpayers earning solely from self-employment/practice of profession, is not applicabie for mixed income earner under the 8% income tax rate option. * The P250,000.00 mentioned above is already incorporated in the first tier of the graduated income tax rates applicable to compensation income. The excess of the P250,000.00 over the actual taxable compensation income is not creditable against the taxabie income from business/practice of profession under the 80% income tax rate option' Illustration 8: Mr. WBV, an officer of AMBS International Corp., earned in 2018 an annual compensation of P1,200,000.00, inclusive of 13th month and other benefits in the amount of P120,000.00. Aside from employment income, he owns a farm, with gross sales of P3,500,000. His cost of sales and operating expenses are P1,000,000.00 and P600,000.00, respectiveiy, and with non-operating income of P100.000.00. His tax due for 201 8 shal1 be computed as follows: income Totalcompensation P 1,200,000'00 (max) Less: Non-taxable 13th month pay and other benefits 90.000.00 Taxable Compensation Income F 1,i 10,000.00 - Add: Taxable Income from Business 3,500,000.00 P Gross Sales Less: Cost of Sales 1"000.000,00 Gross Income P 2,500,000.00 Less: Operating Expenses 600.000.00 Net Income from Operation P 1,900,000.00 Add: Non-operating Income 100.000.00 2.000.000.00 Total Taxabie Income P-IJ-10J0000 Tax Due: F 490,000.00 On F2,000,000.00 355.200.00 On excess (P3,1 1 0,000 - P2,000,000) x 32% Total income tax due P__845200.00 The taxpayer has no option to avail of the 8% income tax rate on his income from business since his gross sales exceeds the VAT threshold. However, he is still not subject to business tax since the nature ofhis business transactions is VAT exempt. (E) Income Tux Rates on Certain Passive Income. - The following passive income shall be subject to the following final income tax rates: a. interests from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar affangemenls - 20o/o; \\r ' 4;ss BRIJrBeEAoI&I O,r!sffrIiE{GEIt{A,ftfTIEsYIEo{TN]E P. n4. ,FEB2020t8 ,ll. L3127 li4/1t'4,? RECEIVED U

receivecl by an individual taxpayer (except a non-resident individual) from a b. lnterest i,corre ,na",.;-," L*pund"a foreign "i't'"n"y deposit - systen.) 15oh; ;"t*ftd;un* oPiPnrrivoliecip'sedinteriadnvsseidu(otB'safSlpePrvte)ri-ud-tteeshrt,mcefeiirndf.iadnbtsaey,ldtacclleoxenfpisgiofh-isctaietallrstmb"u,ebcbislneatipst,uore'st,c"eiltto-srno,'forintrlirtvne.nevsereatsmsmtmepaenrietntrstinmcigrnaibrntrehaadegtLebfrolrynirteymtlhloteofafBtchscaeaonvrig:uinnkvtgosessaS'trcnenondemtnroatm:tlhonelgrl - Four (4) years but less than five (5) years 5olo - Tlrree (3) years but less than four (4) yeal's 12oh; ancl Less than three (3) Years -20o/o - d. Royalties (except royalties on books and other literar,v works atrcl ntLtsical cornpositiorrs) 20% Royaltiesonbooksatrdother.literaryworlisandtnLrsicalcompositiorls-10%; f. Prizes (except prizes amounting to P 1 0'000 or less) - 20o/o; ob' winnings (except Philippine charity Sweepstakes arrd Lotto wiunittgs amounting to P 10.000 or less) -20%; - h. Cash and ProPerlY Dividends 1\ok; - i. capital cains from Sale of Shares of Stoch not Tradecl in the Stock Exchange 15%; j, CapitalGainsfl.omsaleofRealPropertylocatedinthePhilippirres-6%. SThEeCfoTllIoOwNing4.iInNcoCmOeMtaEx TraAtexsRshAaTll EbeSiomNpoNseOdNto-RnoEnS-reIDsidEeNntTaAlieLnIEinNdiIvNidDuIaVl:IDUAL'- A.Nthoceintt-zinreecnosmiadenedntataxAlr,ia"etrenisEaan"prgpiaiiagclaeiebdnleinitTnodratirv-d,iNdeuoiuar*Blpuousnyi.n,theseshsatWlal xbiaetlbrtilhneetiirrneactPeoshmiilmeippdpoeisnreeivdse.od-nlnwigniedthnivienidruathal,el PhiiiPPines; B. Ntacphsooeeimr.inrieo_ptnedreetriincesreissdoatei,rntn.iccoutaonrAsmu,hlruieeealmnrngeduacN/nieonoeirsvtr,epaEpdrtoinroofpgnrfeaot,tgrmsleey'mdaaJonliilrld-r.rslimaioTnue.rcrarroc-adremttess,,eowr'oeraintrBnhtdsouin,stchisantehapereiisatafsrpiilxehwesgii'aiditp*ihnpuosiintn'g'e-td2ttshe5'etobpehyprr"emhtmhiilniisipuapmbtailnsexe'psaaaynn-ennruuuisaptiuleocosnh'r c. TTawrpehpeaagetpxrriorolpianccireneaaoutfltdeemiooerdpen.s,enerTaotatihasvftiiluncapisgenmr.cechaeofoeenltnaildredtecreqaondtucant,atixocarstreler.harrtancaaten.xlaclo.ulnf.nsrn*aodu-rretbipetlrcoitsnoosn,nuar,gte]btrneieasodsrecntecbooatrirfeol.sentchaxso(iephscmapt)riilpe'niicigb(gnaDieiobe)innlsseauat'enblowrdjofnefirst(cahEhttaoi)otoroureoueatftah.bhpSleaeretneaarcekdjtxuigiqonduungtilarcae2ruerla5enitrtniistooecsfosaattm'hhnneieeddf tax rate under Sec' 24(A1 Q)\a) of the Tax Code' as amended' Tiris is in accordance with the veto message of the Plesident which reads as follows: .r'x\V' V, Bmiltl 0F rr{ff.F{At \tf . *r."o,?F, rgr,f EED lR r t,lt Itsba.v \< tl ,a *L t' t-r ir iL ir! L ;r. - a, b--

II. DIRECT VETO By the po||-er yestecl in me by Article VI, Section 27(2) of the Constitution, which provicles fltit "the President shctll have the power toveto ony particular item or items in unuppropriatiot.t't.evenzte'ortariJfbill,',Iherebl,registerthe/bllowinglineitemvetoesto this lav,: A. Reduced income tax rate of employees of Regional Headquarters (RHQs), Regionol Operating Headquurters (ROHQs), Offihore Banking Units (OBUs), and Petroleum Service Contractors ond Subcontractors. I an.t colstrainecl to veto the proviso under Section 6(F) of' the enrolled bill that ffictively nrctintains the special tax rate of 15% of gross income for the aforementioned employees, to wit: "PROVIDED, HOWEVER, THAT EXISTING RHQS/ROHQS, OBUS OR PETROLEUM SERVICE CONTRACTORS AND S(IBCONTRACTORS PRESENTLY AVAILING OF PREFERENTIAL TAX RATES FOR QUALIFIED EMPLOYEES SHALL CONTINUE TO BE ENTITLED TO AVAIL OF THE PREFERENTIAL TAX RATE FOR PRESENT AND FUTURE QUALIFIED EMPLOYEES." lqhile I trnclerstand tl.te latrdable objective of the proposal, the provision is violative of Eqtral protection Clause under Section I, Article III of the 1987 Constitution, as well as tl.le rttle of eqttie and uniformity in the application of the burden of taxation: section l. No person shalt be deprived of life, liberty or property without due process of lctw, nor shull any person be denied the equal protection of the laws. In line with this, the overriding consideration is the promotion of fairness of the tax performing similar work. Given the significant reduction in the systen't for inrlividuals the employees of these firms should follow the regular tax rates personal income tax, applicable to other individual taxpqyers. Illustration 9: Ms. CCF, an alien employed in MCUD Corporation that is a Petroleum Service Contractor, received compensation income of P5,000,000'00 for 201 8, inclusive of P400,000.00 1 3th month pay and other benefits. Computation of Taxable Income: P 5,000,000.00 90.000.00 Compensation Income Zess.' Non-taxable 13th Month Pay and other benefits (max) P_4p_1_0,000-00 Taxable Compensation Income Tax Due: P 490,000.00 On P2.000,000.00 931.200.00 On excess (F4,910,000 - P2,000,000) x32% Total tax due P,1=421200-00 All employees of RHQs/ROHQs/OBUs, and Petroleum Service Contractors under Sectio" Subcontractors shall be subject to regular income tax rate . \{\+, BIIN%IJ OT TNIER{AI BETETUN , ,* mcanCos;.5{,516Ip_,, lA 1'1<Jt,Lr,tl FEB 2 0 orylsroN \y . 20lB l_l and RECEIV ruWT

2aA)Q)@) of the Tax Code, as amended, without prejudice to the appiication of preferential tax rates under existing internationai tax treaties, if warranted. SECTION 5. GOVERNMENT OWNED AND CONTROLLED CORPORATIONS (GOCCS), AGENCIES OR II{STRUMEI{TAIITIES. - Under Section 27(C) of the Tax dode. as amended, GOCCs, Govemment Agencies or Instrumentalities shall pay such rate of tax upon their taxable income as imposed upon corporations or associations engaged in a similar business, industry, or activity, except for the following: a. Government Service Insurance System (GSIS); b. Social Security System (SSS); c. Philippine Heatth Insurance Corporation (PHIC); and d. Local Water Districts (LWD). SECTION 6. EXCLUSIONS FR.OM GR.OSS INCOME. - The following items shall not be included in gross income and shail be exempt from income taxation: A. Life Insurance. - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income; B. Arnount Received by lnsured as Return of Premium; C. Gifts, Bequests, and Devises; D. Compensation for Injuries or Sickness; E. lncome Exempt under TreatY; F. Retirement Benefits, Pensions, Gratuities, etc.; - G. Miscellaneous ltems. a. Income derived by Foreign Government; b. Inconte Derived by the Government or its Political Subdivisions; c. Prizes and Awards d. Pri:es and Awards in Sporrs C<tmpelition" e. l3th Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion $nEFIAtlEvEflrE * \ under this itern shallnot exceed ninety thousand (P90,000.00), which shall cover: \5.." BuBUAct 0r ^ REC$EgIiVro.fEi|irDw;r+:t/ron A rEg z"o nrJonous. I t6 t27

(i) Benefits received by officials ancl ernployees of the national and local government pursr-tant to Republic Act No' 6686; (ii) Beneflts receire,l by employees pllrsliallt to Presidential Decree No' 851' as amended b-v Memoiandum brclerNo.28 dated Ar-rgust 13' 1986; (iii)Benefitsreceivedbyofficialsatlden-rployeesnotcoveredbyPresidentiai Decree No. g51, as amended by Memorandum orderNo.2S dated August 13,1986; and (iv) Other benefits such as productivity inceltives and Christmas bonus; f. GS1S, SSS, lulecliccn'e ctncl Other Contribution's; g. Gcrin,t.t'i.om the Scrle o.f Boncls, Debenttres or other Certificate of Indebteclness utith ct matLffity of tnore than.five (5) year't; ond h. Gcdns .fi'ont Redemption of Shares in l4utual Fund' SbmeiohsemerEonrrwpenCeelqehfioTniutetyasIineOirrmeeyatNdstphv)ro.eabhbsly7efueyr.eitdrnhtaShgeotieesPefnEoepfabrmfaCtieunyrpnIrgIaAel{eoebIfLyRlioetebfTT,reib,snoRYywerfoE-tfhnFhirtAeeseItctThVhefeeuMesEmrsrcnEapoaiprsNlnnyohtvryTietReneodndrCOit,ieivorEwneFircNchlgteuFrTiracaaRdohln(eIfo3tN,teora5dbGr%xautaEsco)sdioinsrvaBteahpanslEaonlsletrNbraamoebgEtriepeopFplnioao'IrrTyoifpd(efuStoeehnis'snelese(-eist-edohsxnmTecotTenhposCpelfatothmtfIyhreAraeieenXngrgmer)kOoe'maNsaTnbspnhfneeTldoeedinNy-lfetgeuiaiafCeprixst' provided ior under Section 57 (A) of the Tax Code' as amended' TaJdbacheetnettuewuargaemlrreomyinnsoeLsoned,2nedbe-t0auy7rphy8dumvniavadonidlrnudeieendotga"onprwiytehatrvhecrade.alsnulc:rtetiPnu(o1argol0fevm0tibhd%oeeenc)netlei,ut'ihannthrtdg'ybaeyttvhtbahSe.leunIaeXegpfroTipot flsYiscsthhea-Fadeb-llMluefrpbitneavPgxadeEleurRtbaeeetCreomnEsefiNnfutihetnTdedb(eybb6rey5tltn-%lrd'eerie)fv,idtidaiefslfifonelierrrgaeceistnlitavhcbieedee subsections. Illustration 10: MRU Company (a domestic eniployer/company) granted Ms' managel employee), in addition to her basic salaries' MHLCO (a Filipino blanch hel personal men-rbership fees at Country Goif Club' P5,000 cash per quafter for The Fri,ge Benefits Tax (FBT) shall be compr,rted as fbllows: Monetary value of fi'inge benefit: P 5,000.00 6s% Perceutage divisor aPPlicable: 35% FBT rate: - FBT: (Monetary value ot- tiinge benefit 65%) x35o/o FBT: (P5,000.00 + 65oh) x35oh FBT: P7.692.31 x 35o/o \$ FBT: ?2,692.37 V 17127 ER{fFEcAoU4oDrtfiimaGnFL{aor tRuEsviBo{tNE F-4E".Bfs2'0P2.0tttg t_t RECEIVElDhJt4O*

Illustration 11: Same facts but the employee is a non-resident alien individual not engaged in trade or business within the Philippines: Monetary value of fringe benefit: P 5,000'00 Percentage divisor applicabie: Fringe benefit tax rate: 75% 25o FBT: (Monetary value of fringe benefit + 75o/,) x25oh FBT= (P5,000.00 + 75%) x25o/o FBT: ?6,666.67 x25o/o FBT: ?1.566.67 - SECTION 8. DEDUCTIONS FROM GROSS INCOME. IN gCNCTAI, thCTC ShAII bC allowed at the option of the taxpayer, itemized deductions or an Optional StandardDeduction (OSD) at the rate of forfy percent (40%). In case of individual taxpayers, OSD shall be rate of forfy percenl (40%) of gross sales/receipts, as the case may be' computed at the Corporations elect standard deduction in an amount not exceeding forfy percent $0%) of may its gross income. However. no deductions shali be allowed to individual taxpayers eaming compensation income employer-empioyee relationship, and those arising fiom personal services rendered under an on their income from business/practice of who Jpted to be taxed at 8o/o income tax rate profession. The following are the allowable itemized deductions: A. Expenses; B. Interest; C. Taxes; D. Losses: E. Bad Debts; F. Depreciation; G. Depietion of Oii and Gas Wells and Mines; H. Charitable and Other Contributions; I. Research and DeveloPment; and J. Pension Trusts. Unless the taxpayer, who is taxable under the graduated income tax rate, signifies in the income tax return the intention to elect the OSD, it shall be considered as having availed of the itemized deductions. Such election of the option, when made in the return, shall be irrevocable for the taxable year for which the return ii made. The eiection to claim either the itemized deductions \[ BINEAU OI nIIIINAT IEVEIUE Rf,coa9{_:! ncr. po,ftftts. ton 18127 Sg \ REFCEB Ea0IzVotEE!,D1f,'".

otcaroxmthmereeOtunScrDnemffoielrenttdhoeffbtaarxnatehbwleebfyuiersasinrtemqisuu/saptrrarbecertiscoiegrnotihffieepdrionbfyeitsicashiioeqcnk.uiOnagrntcetehreothafeptephireeocpttraioiaxntaebisblemoxyaedineat'rhietamtitneucrsotmthbeee consistently applied to all the succeeding quarterly retums and in the final income tax return fbr the taxable vear. The OSD allowed to individual taxpayers, except non-resident aliens, shall be fofi percent (40%) of gross sales/receipts during tire taxableyear. An individual who is entitled to and cSPltaaaritmtenmeerdesnhftosipro(tGthhePerPOw)SismDearysehqaauviilraenidlootufbntdeheerretOq'huSeirDeTdaoxtnolCysouodbnecm,eai,tsewaitimthheernthdbeeydt.tahAxereGGtePunrPnerosarui ctPhhreoFfepinsasarintoncneiaarsll comprising the PartnershiP. Illustration 12: Ms. RPSV is a prominent independent contractor who offers architectural and engineering services. Since RPSV's career flourished, her total gross receipts arnounted to P4,250,000.00 for taxable year 2018. Her recorded cost of service and operating expenses were P2,150,000'00 and P1,000,000'00, respectively. She opted to avail of the 40% OSD' OSD wiil be computed as follows: P 4,250,000.00 40% - Gross Receipts Architectural and Engineering Services P 1.700.000.00 Multiply by OSD Rate Deductible OSD Net Taxable Income will be computed as follows: Gross Receipts - Architectural and Engineering Services P 4,250,000.00 Ze,ss: OSD 1'700'000'00 Net Taxable lncome P 2"550'000'00 lncome tax liability will be computed as follows: F On F2,000,000.00 - P2,000,000'00) x32o/o 490,000'00 126'000'00 On Excess (P2,550,000.00 Tncome Tax Due P--666*000-00 * The individualtaxpayer elected OSD in the computation of hertaxable income and the election is irrevocable for the taxable year for which the retum was made. x Taxpayer is not required to submit her financial statements with his tax retum. * The gross receipts exceeded the VAT threshold of P3,000,000'00, thus. the taxpayer is subject to the graduated income tax rates and iiable for VAT, in addition to income tax. Illustration 13: Ms. MRU operates a convenience store while she offers bFFPo114o,,083k002k,50e0,,0e0000p000i.n.0.00g000.s,aeHinrndveircaPedr3esd2ci0ttoi,oo0rdn0he0etd.o0r c0hoc, elsriertengostrfsop.sgesoInocred2tcsi0evs1ipoe8tls,dlyfhar'oenmrd$obrpooesorskaktsienaeglepsienxgapmesnoesruveniscteewdseotrofe \V.,r.. o'o*ia.j5?" V !rgE4u- prllr{Ar nEVENUB l,ffjo* t9127 FEB 2o z0t8 RECEIVEbD$1lU4^

A. Ms. MRU opted to avail of the OSD. The OSD and taxable income shallbe computed as follows: Gross Sales -Convenience Store P i,800,000.00 400.000.00 Gross Receipts - BookkeePing P 2,200,000.00 Total 880.000.00 Ze^ss: OSD (P2,200,000.00 x 40%) P 1.320.000.00 Net Taxable Income Tax Due: P 130,000.00 On P800,000.00 i 56.000.00 On Excess (P1,320,000.00 - P800,000.00) x 30o/o P286J0000 Total tax due * The taxpayer elected OSD in the computation of her taxable income, thus the graduated income tax rate shail be applied' * The election of OSD is irrevocable for the taxable year for which the retum is made. x Taxpayer is not required to submit her financiai statements with her tax retum. * Taxpayer is liable for business tax - Percentage Tax, in addition to income tax. B. Ms. MRU',s income tax liability, if she signifies in her 1't Quarter retum her intention to be taxed at 8oh income tax rate, wiil be computed as follows: Gross Sales {onvenience Store P 1'800'000'00 Gross Receipts - Bookkeeping 400'000'00 Total allowed as deduction under Sec' P 2'200'000'00 Ze,ss: Amt. 2a(A)(2)(b) 250'000'00 Net Taxable Income P 1.950.000.00 Tax Due: P__116,000-00 8% of P 1,950,000.00 * The gross sales and receiPts did not exceed the VAT threshold of P3,000,000.00. * Taxpayer opted to be taxed at 8%o income tax rate on gross salesireceipts' * Taxpayer's source of income is purely from self-employment, thus she is entitled to the amouni allowed as deduction of P250,000.00. * Taxpayer is not liable for percentage tax under Section 116 of the Tax Code, as aminded, since the B% income tax rate is also in lieu of the percentage tax. cf w nscoea;,toJ:p.ygron BTIFEAII OF BEVE['{T'E '}flEF{A! FEB 20 2018ulN:frr. y" " RECEIV(,V0 zotzT

PIolpl6ue.0sr0atr0tai^n0tgi0o0en.x0p10e,4n:swTeishtheamcgoroosustnstoinsfaglsetasoleoPsf1aG,0m0Eo0Au,0nL0ti0nC.g0o0rtp,ooarPnadt4io,o0nn0f0bth,r0e02f00i1l.i0n80ga. moItofuiinntscteuFdrriertsdot Quarter i,l.o*. Tax Return, it signified its intention to avail of the OSD. Computation of OSD and Tax Due: P 6,000,000.00 Gross Sales Ie,s.s.' Cost of Sales 4.000.000.00 Gross Income Ze.s'.v.' OSD (P2,000,000.00 x 40%) P 2,000,000.00 Taxable [ncome 800.000.00 P1200J00J0 Tax Due: P __360.0!0-00 30% of F1,200,000.00 * OSD for corporation is based on gross income. * Income tax rate of corporation is currently at30o/o' Determination of the optional standard Deduction for General Professional Partnerships (GPPs) and Partners of GPPs. GPP is not subject to income tax imposed pursuant to Sec. 26 of the Tax Code, as amended' However, the partners shall be liable to puy income tax on their separate and individual capacities for their respective distributive share in the net income of the GPP' The Gpp is not a taxable entity for income tax purposes since it is oniy acting as a "pass- through,, entity where its income is ultimately taxid io the p.artners comprising it. Section 26 likewise piovides that- "For purposes of computing the of thE Tax iode. as amended, distributive share of the partners, the net income of the GPP shall be computed in the same manner as a corporation.i' As such, a GPP may claim either the itemized deductions allowed under Section 34 of the Code or in lieu thereoi it can opt to avail of the OSD allowed to corporations in claiming the deductions in an amount not exceeding forly percent (40 %) of its gross income. In computing taxable income defined under Section 31 of the Tax code, as amended, the following may be allowed as deductions: a. itemized expenses which are ordinary and necessary, incured or paid for the practice of Profession; OR b. Optional Standard Deduction (OSD). The distributable net income of the partnership may be determined by claiming either itemized deductions or OSD. The share in the net income of the partnership, actually or c.onstructively received, shatl be reported as taxable income of each partner. The parlners comprising the GPP in the net income of the GPP no longer clairn further deduction from their distributive share their distributive share from are not allowed to avail of the 8% income tax rate option since "t'rf can and the GPP is already net of cost and expens BIFT,IU OT NMN{AL REVEMJE 2L121 " Rf &aeos fiaGr. orvTsroN &f FEBt0zora RECEIVED"

If the panner also derives other income from trade, business or practice of profession apart and distinct from the share in the net income of the GPP, the deduction that can be claimed from the other income would either be the itemized deductions or OSD. Illustration 15: Mr. JMLH is a partner of AMBS & Co., a general professional parlnership. and owns 25ohintetest. The gross receipts of AMBS & Co' amounted io p 10,00fj,000.00 for taxable year 2018. The recorded cost of service and operating expenses of AMBS & Co. were P2,750,000.00 and P1,500,000.00, respectively' If AMBS & Co. availed of the OSD, the deductions and net income shail be computed as follows: Gross Receipts P10,000,000.00 Zess: Cost of Services 2.750"000.00 Cross lncome P 7,250.000.00 Ie^ss.' OSD (P7,250.000.00 x 40%) Net lncome for distribution to paftners 2.900"000.00 P_4J50,000,00 * There is no income tax 1iabiliry for AMBS & Co. since it is a general professionalpartnership under Section 26 of the Tax Code, as amended. * The GPP eiected oSD in the computation of its net income and its election is irrevocable for the taxabie year for which the return is made' * The GPP is liable to business tax. The income tax liability of Mr. JMLH will be computed as follows: Share in Distributive Profit (F4,350,000.00 x25%) P 1.087"500.00 Tax Due: F 130,000.00 On P800,000.00 86.2s0.00 On Excess (P1,087,500.00 - P800,000.00) x 30o/o P 2 r 6.250.00 Income Tax Due * Individual partner is not allowed to claim further deduction from his distributive share since this is already net ofcost and expenses. * Taxpayer is not allowed to avail 0f the 8%o income tax rate option since theii distributive share from GPP is already net of cost and expenses. Illustration 16: Ms. GEAL is a partner of CCF & Co., a general professional partnership, and owns 25%o interest. The gross receipts of CCF & Co' amounted to taxable year 2018. The recorded cost of service and operating Co. were P2,750,000.00 and P1,500,000.00, respectively' r rh !, irt O,OOO.Ob0.00 for r.I -. expenses of CCF & {d E-nIfIPeIo'IIa' Oo(;FsffIERliA[ BEIVENTJE urGTL ofr?S[ON P,l/k ple* FEB2o z0ro RECEIVEDA 1) t)1

ReceiPts P The Net Income of CCF & Co. rvi1l be computed as follorvs: 10,000,000'00 Gross le,s,s. Cost of Services Gross lncome 2'750'000'00 P 7"250'000'00 LNee,ts,Isn;cOopmeetaftionrgdEistixibputeionn stoepsartners 1'500'000'00 ?-jJ50J00-00 * There is no income tax liability for CCF & Co. being a general professional partnership under Section 26 of the Tax Code, as amended' * The Gpp elected itemized deduction in the computation of its net income and its eiection is irrevocable for the taxable year for which the return is made. * The GPP is liable to business tax. x25%) The income tax liability of Ms. GEAL will be computed as foilows: Share in Distributive Profit (P5,750,000.00 P 1.437.500.00 P8oo'ooo.oo Tax Due: F 130'ooo'oo x30oh on 191.250'00 on E'xcess (P1,437,500.00 - P800,000.00) P--12-lJ{'00 lncome Tax Due * Individual Partner is not aliowed any deduction on his distributive share since this is aiready net ofcost and expenses' * Taxpayer is not allowed to avail of the 8olo income tax rate option since her distributive share from GPP is already net of cost and expenses. SECTION 9. INDIVIDUALS NOT REQUIRED TO FILE INCOME TAX RETI]RN. - The following individuals are not required to file income tax return: A. An individual earning purely compensation income whose taxable income does not exceed Two Hundred Fifty Thousand pesos (P250,000'00); The Certificate of Withholding filed by the respective employers, duly stamped ,.Received,, by the Bureau, shail be tantamount to the substituted filing of income tax returns by said emPloYees' B. Ap individual whose income tax has been correctly withheld by his empioyer, provided - that such individual has only one employer for the taxable year the Certificate of Withholding filed by the respective employers, duly stamped "Received" by the Bureau. shall be taniarnouht to the substituted filing of income tax returns by said employees; C. An individuat whose sole income has been subjected to final withholding tax; A rninimum wage earner as defined in these regulations - The Certificate of Withholding fileJ by the respective employers, duly stamped "Received" by ,h. BEVE}{UE fi' \ ' D. , *f.. BUPE/4U cF nflERlIA[ tV ds RI COR.OgS: iVTGf, 'PIW.uS. ICN ' RECEIVE/.4Dl-tY/ FEB2020|8 23t27

Bureau. shall be tantamount to the substituted filing of income tax returns by said employees In all cases, all individuals deriving compensation income, regardless of the amount, from two (2) or more concurrent or successive employers at any time during the taxable )iear. are not qualified for substituted filing. Thus, they are still required to file a return' SECTIOI\ 10. TIME OF FILING OF INDIVIDUAL INCOME TAX RETL'RN. - I6dividuals engaged in business/practice of profession, regardless of amount of sales/receipts, are required to flL quarterly income tax return on or before Nlal' 15, August 15 and Nlovember sTecaoxndCaonddeth,iradsqauamrleenrsdeodf ;thaencdurtreontfiyieeara, rnesapnecntuivaellyinpcuorsmuaenttatoxSreectutironn, i5 for the first, rhe fifteenth (15th) day of the fourth month following the close of the 74(A) of the or April 15 as provided under Section 51(CX1) of the Tax Code, noi tut., rhan calendar year as amended. Illustration 17: Ms. Alona Will, a popular actress, received talent fees from EBQ- Cyril promotions amounting to P20,000,000.00 for 20i8. The creditable taxes withheld from the talent fees amounted to Pl,600,000.00. She incurred costs and expenses amounting to P5,000,000.00. Her income tax shall be computed as fo[1ows: Gross Receipts P 20,000,000.00 Zess.' Costs and Expenses 5.000.000.00 Taxable Income P r 5.000.000.00 Tax Due and Payable: P 2,410,000.00 On F8,000,000.00 2.450"000.00 On Excess (P15,000,000 - P8,000,000) x 35% P 4,860,000.00 TotalTax Due 1.600.000.00 Zess.' Creditable Taxes Withheld P 326.0,000J0 Net Tax Payable * Taxpayer is required to file quarterly and annual income tax returns. * The creditable tax withheld is deductible from the income tax due. * Taxpayer is allowed to pay in two (2) equal installments since the tax due is more than P2,000'00. * As a professional actress, taxpayer is also liable to pay business tax. SECTION 11. INSTALLMENT PAYMENT OF INDIVIDUAL TNCOME TAX. - WhEN the tax due is in excess of Two thousand pesos (P2,000.00), the individual may elect to pay the tax in two (2) equal installments, in which case, the first installment shall be paid at the time the annual income tax return is filed and the second installment paid on or before October 15 tvl' lotlowing the close of the calendar year.. BIIFPA,I' or INTER{AI REVE{UE Rt{}a&D$ .frf4.6fr.PU.tuw.stoN 24t27 4; FEB a0z\t\Lkii,a,t_ RECEIV,Ery

If any installment is not paid on or before the date fixed for its payment, the whole_amount of the unpaid tax becomes due and payable, together with the delinquency penaities to be reckoned on the original date when the tax is required to be paid. SECTION 12. R.EGISTRATION UPDATES. - ln relation to Sections 2a(A)(2Xb) and 2a6)e)G)(2) of the Tax Code, as amended, relative to the option of self-employed individuais unjloiproi.rrionuls to avail oian 8% income tax rate based on gross sales/receipts and other non-oplrating income, the existing non-VAT taxpayer who is contemplating to avail of the 8% income tax rate at the beginning of the taxable year or before the due date for filing and/or payment of the p....ntugi tax shall file an Application for Registration Information Update tax. [f the taxpayer is i3in nor,r, No. 1905) to*end-date the registered tax type of percentage file the percentage tax update the required registration, s/he shall continue to unable to timeiy return reflecting a zero-amouni of tax with a notation that s/he is availing of the 870 income tax rate option for ihe taxable year. S/he is stillrequired to signifr the intention to avail the option on the initial quarterly income tax return for income tax purposes. On the other hand, if the non-VAT taxpayer opted to be taxed under the graduated income tax rates s/he shall continue to pay the required percentage tax under Sec' 1 16 of the Tax Code, as amended. A taxpayer who initially presumed that the gross sales/receipts and other non-operating income for the taxable year wilinot exceed the P3,000,000.00 VAT threshold but has actually exceeded the same during the taxable year, shall immediately update his/her registration to reflect the to a VAT taxpayer. S/he shall be required to update change in tax profile from non-VAT month foilowing the month s/he exceeded the VAT regisiration immediately within the thieshold. S/he shall OL tiaUte to VAT prospectively starting on the first day of the month followilg the month when the threshold is breached. The taxpayer shall pay the required percentage tax covering the sales/receipts and other non-operating income, from the beginning loiarbcleomfomrenVcAemTe, nwt iothfobuutsiinmepsos/spirtaiocnticoefopfepnraoflteyssiifontimunetlyil the time the of the taxable year paid on the taxpayer becomes immediately succeeding month/quarler. Thus, there may be an instance when a taxpayer files fwo (2) business tax retums in a month/quarter - i.e., percentage and VAT returns. A VAT taxpayer who did not exceed the VAT threshold within the immediately preceding taxpayer and avail of the 870 income tax rate three (3-)Sy7ehear period, may opt to be a non-VAT on or before the first quarter ofa taxable year option. shall update the registration records to reflect the change in registration. However, s/he shall remain liable for VAT for as long as there is no update of registiation and VAT-registered invoices/receipts are continuously issued. Registration updates sf,all be subject to existing rules and regulations on updates, verification, inventory and surrender/cancellation of unused VAT-invoicesireceipts. A non-VAT taxpayer who volunteers to be a VAT taxpayer knowing that sales/receipts and other non-operating income will exceed the VAT threshold within the taxable year, shall update the registrafion records. Such taxpayer becomes liable to VAT on the day when such updating is made. In this case, the taxpayer shall automatically be subject to the graduated income tax rates if the 8%o income tax ratl option is initially selected. Any income tax paid under the said the graduated income flat 8oh income tax rate shall be deducted from the income tax due under tax rates. The percentage tax due lrom the beginning of the taxable year or commencement of business/practice of profession shall be paid on the month/quarter immediately following such registration update. However, if the graduated income tax rates is chosen from the beginning, - a . " r{ iRllREeceoun-ofc,Fs{:If{f'iIGlB-It.Aop[.-1Bff,';ESVIOEN{[[E f- N " 25 I 27 FEB 20 2018 , RECEIV

then taxpayer ceases to be liable to percentage iax upon registration updates and instead is nolv liable to VAT. Illustration 18: Ms. ENA is a newly registered non-VAT taxpayer engaged in on February 1. 2018. In September 2018' her merchandising of car accessories reached three million cumulative gross salesireceipts five hundred pesos (P3,500,000.00). a. If the taxpayer availed the |Yo income tax rate upon her registration with the BreltRuronn, Fsheebrisua,eryqlu,2i.0.dlstooruuppodantfeilihnegrorfehgeisrtfriarstiotqnuaanrdtecrioyminpciyomwiethtatxhe following: r Ms. ENA needs to visit BIR Office where she is registered to register as vAT taxpayer or before october 3 1, 201 8, one month from the time that she exceedeci the P3,000,000'00 VAT threshold' * Since she availed the option of 8o/o income tax fate (not required to file tchoevepreinrcgenthtaeg-estaalexsr/eretucmeip),tssiarendshoatlhl efirienothne-orpeeqruairteindgpienrccoemntaeg,efrtoaxl February i to September 30, 2018 due on or before october 20, 2018, without imposition of penalty if timely paid. She is likewise liable to VAT beginning October i,2018' * The taxpayer shail automatically be subjected to the graduated income tax rates from the time the gross saies/receipts and other non-operating income exceeded the VAT threshold' * The 8-%o income tax paid by the taxpayer shall be credited/deducted from her annual income tax due using the graduated income tax regime. b. If the taxpayer did not avail the 8% income tax rate upon her registration with the fim on February i, 201 8 or upon filing of her first quarterly income tax retum, she shail update her registration and comply with the following: * Since she is subject to the graduated income tax rate, she is required to file the 1't and 2fr quarterly percentage tax returns' The iast quarterly percentage tax return that she needs to file should cover the period Juiy i ' 201 8 to September 30, 201 8, which is due on or before october 20, 201 8' She becomes liable to VAT on October 01,20i8' * The taxpayer needs to visit the BIR Office where she is registered to update heiregistration profile as VAT taxpayer on or beforeOctober 3 1, V ffirt3:HltAtlqry* \}J' 2b18, one ,ronth lrom t-he time that she exceeded the P3,000,000.00 VAT threshord \-z {,.r,f prrsroN FEB z0 20t8 /rJ,q_ RE CEIVfuD- 26121

SECTION 13. TRANSITORY PROVISIONS. - In connection with the provision of Section 24(AX2Xb) and Section 2a(AX2)(c) of the Tax Code, as amended, all existing VAT registered gross sales/receipts and other non-operating income in the preceding year did taxpayers rvhose VAT threshotd of P3,000,000.00 shall have the option to update their not exceed the Minavrecnhto3r1y ,2a0n1d8s-ufrbrellnodweirn/cganthceellaetxioisntinogf procedures on to non-VAT until unused VAT registration updates, and the re!istration invoices/receipts. After the above-mentioned date. existing VAT-registered taxpayers who have not exceeded the for the immediately preceding three years, may opt to update their registration to threshold non-VAT loiiowing .ui.s uri regulations on registration updates, verification, and the inventory and cancellation of VAT invoices/receipts' SECTION 14. REPEALING CLAUSE. - A11 revenue issuances that are inconsistent with the provisions of these Regulations are hereby amended, modified or repealed accordingly' SECTION 15. EFFECTMTY. -These regulations are effective beginning January 1,2018, the effectivity date of the TR {iN Law. CARLOS G. DOMINGAEZ Secretary ofFinance 001 21 1 FEB 1 5 2010 Recommending Approval : BTIP!:.{U OF T{TBBUT& FHHIfl RE c O8r3 iY.GS UtlaSICl{ /\L, orr4er,.A$-a'1- Wffff FEB 2 o 2018 ,l^1. ^. CA.ESAR R. DUI,AY RECE ,u''o13125 Commissioner of lnternal Revenue )1 l)1