I.    Objective

This Order is being issued to prescribe policies, guidelines and procedures in availing the eight percent (8%) income tax rate option of individuals earning from self-employment/business and/or practice of profession relative to the implementation of the Republic Act No. 10963, otherwise known as œTax Reform for Acceleration and Inclusion (TRAIN) Act .

II.    Policies and Guidelines

Eight Percent (8%) Income Tax Rate Option for Individuals

1.    In general, income of self-employed individuals (includes Single Proprietors, Professionals and Mixed Income Earners) is subject to the graduated income tax rates as provided under Section 24 (A)(2)(a) of the NIRC, as amended.

2.    Self-employed  individuals  earning  income  purely  from  self-employment/ business and/or practice of profession whose gross sales and/or receipts and  other non-operating income does not  exceed the  Value-Added Tax (VAT) threshold of Three Million Pesos (P3,000,000.00) shall have the option to avail of the following:

a.   Graduated income tax rates as provided under Section 24 (A)(2)(a) of the NIRC, as amended; or

b.   Eight  percent  (8%)  tax  on  gross  sales  or  receipts  and  other  non- operating income in excess of Two Hundred Fifty Thousand Pesos (P250,000.00) in lieu of the graduated income tax rates and percentage tax under Section 116 under the NIRC, as amended.

3.    Individuals   earning   income   both   from   compensation  and   from   self- employment (business or practice of profession) or Mixed Income Earners shall apply the following income tax rates:

3.1 The compensation income shall be subject to graduated income tax rates as provided under Section 24 (A)(2)(a) of the NIRC, as amended; and

3.2 The income from business or practice of profession shall be subject to the following:

a.    If the gross sales/receipts and other non-operating income do not exceed the VAT threshold, the individual has the option to be taxed at:

i.    Graduated  income  tax  rates  as  provided  under  Section  24 (A)(2)(a) of the NIRC, as amended; or

ii.  Eight  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 tax under Section 116 of the NIRC, 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 Section 24 (A)(2)(a) of the NIRC, as amended.

4.    The following criteria should all be satisfied to be able to qualify and avail of the 8% income tax rate option:

a.   Individuals (Single Proprietor or Professional or Mixed Income Earner) earning from self-employment and/or practice of profession;
b.  Taxpayers whose gross sales/receipts and other non-operating income did not exceed the P3,000,000 VAT threshold during the taxable year;
c.   Taxpayers registered and subject only to percentage tax under Section
116 of the NIRC, as amended; or taxpayers exempt from VAT or other percentage taxes; and
d.   Must have signified their intention to elect the 8% income tax rate thru any of the enumerations under Section II (7) of this Order.

5.    The 8% income tax rate option is not available to the following individual taxpayers  and  correspondingly  shall  be  taxed  based  on  the  graduated income tax rates prescribed under Section 24 (A)(2)(a) of the NIRC, as amended.

a.   Purely Compensation Income Earners;
b.  VAT-registered taxpayers, regardless of the amount of gross sales or receipts and other non-operating income;
c.  Taxpayers exempt from VAT or other percentage taxes whose gross sales/receipts and other non-operating income exceeded the P3,000,000
VAT threshold during the taxable year;
d.   Taxpayers who are subject to Other Percentage Taxes under Title V of the Tax Code, as amended, except those subject under Section 116 of the same Title;
e.   Partners of a General Professional Partnership (GPP);
f.    Individuals enjoying income tax exemption.

Individual person who is exempted from income tax such as those registered Barangay Micro Business Enterprises (BMBEs) is bound to the choice that it made to avail itself the privilege under Republic Act No. 9178 for the entire period of its registration with the BIR pursuant to Department Order No. 17-
04.

The BMBE cannot avail both BMBE status (exempted from income tax, but liable to other internal revenue tax) and the 8% income tax rate option (in lieu of the graduated income tax rates and percentage tax) at the same time, since taxpayers are not allowed to avail of double or multiple tax exemption under different laws, unless specifically provided by law.
 
6.    At  the  beginning  of  each  taxable  year,  all  individuals  are  subjected  to graduated income tax rates as provided under Section 24 (A)(2)(a) of the NIRC, as amended. Self-employed individuals who opted to avail of the 8% income tax  rate  is  effective only  for  the  current taxable year  when  the election has been made, and shall be automatically subjected to the graduated income tax  rates  at  the  beginning of  the  succeeding taxable years. Thus, the availment of the 8% income tax rate option is required to be signified and selected every taxable year, if the taxpayer wishes to be covered by such income tax rate.

7.    Self-employed individuals shall signify the intention to elect the 8% income tax rate in filing any of the following:

7.1 New Business Registrant

a.    Upon registration using BIR Form No. 1901 and/or 1701Q; or
b.    On the initial quarter return (BIR Form No. 2551Q and/or 1701Q) of the taxable year after the commencement of a new business/ practice of profession.

7.2 Existing Individual Business Taxpayers

a.    Filing of BIR Form 1905 (Application for Registration Information Update) at the beginning of the taxable year, to end-date the form type of quarterly percentage tax. Provided that an option to avail the eight percent income tax rate shall be selected in filing the initial quarterly income tax return for income tax purposes; or
b.    1st Quarterly Percentage Tax Return; and/or c.    1st Quarterly Income Tax Return.

Otherwise, the graduated income tax rates shall apply.

8.    The  income tax  rate  option, once  elected, shall be  irrevocable, and  no amendment of option shall be made for the taxable year it has been made.

e.g. Mr. A elected the 8% income tax rate option on February 14, 2019 by filing BIR Form 1905. Later, before the due date on filing of the 1st Quarterly Percentage Tax Return or 1st Quarterly Income Tax Return, Mr. A had a change of heart to be taxed at the graduated rates. Can Mr. A signify the option to be taxed at the graduated rates in filing his 1st Quarterly Percentage Tax Return or 1st  Quarterly Income Tax Return or re-filing the BIR Form 1905 before filing his 1st Quarterly Percentage Tax Return?

The answer is no. The election made on February 14, 2019 is irrevocable and no amendment of option shall be made for the said taxable year. Beginning 2020, Mr. A is automatically subjected to the graduated income tax rates, unless opted to elect the 8% income tax rate by signifying his intention.

9.    Self-employed individual who is qualified and availed of the 8% income tax rate option is:

a.  Required to file the Quarterly Income Tax Return, unless exempted by any revenue issuances;
b.   Required to file the Annual Income Tax Return [Financial Statement (FS)
is not required to be attached];
c.   Not required to file the Quarterly Percentage Tax Return;
d.   Required to signify the intention to avail the 8% income tax rate every taxable year.
e.   Required to maintain books of accounts and issue receipts/invoices;

A taxpayer shall automatically be subjected to graduated income tax rates, liable to VAT prospectively and attached an audited FS in filing of the annual income tax return, if the gross annual sales and/or receipts exceed the amount of Three Million Pesos (P3,000,000.00) anytime during the current taxable year when the option was made. S/he shall immediately update his/ her registration within the month following the month s/he exceeded the VAT threshold  to  reflect  the  change  in  tax  profile  from  non-VAT  to  a  VAT taxpayer. Percentage tax shall be imposed from the beginning of the year until taxpayer is liable to VAT.

10. Taxable  income  for  individuals  earning  income  from  self-employment/ practice of profession shall be based on:

a.   The net taxable income, if taxpayer opted to be taxed at graduated rates or has failed to signify the 8% income tax rate option;
b.   The gross sales/receipts and other non-operating income in excess of P250,000, if the 8% income tax rate is availed by self-employed individuals earning income from purely self-employment and/or practice of profession. However, in case of Mixed Income Earner, the taxable income is based on the gross sales/receipts and other non-operating income without the P250,000 reduction, if the option availed is the 8% income tax rate.

Two Hundred Fifty Thousand Pesos (P250,000) Reduction from Taxable Gross Sales/Receipts and Other Non-Operating Income

11. The provision under Section 24(A)(2)(b) of the Tax Code, as amended, which allows an option of 8% income tax rate on gross sales/receipts and other non-operating income in excess of P250,000.00 is available only to self-employed  individuals  earning  income  purely  from  self-employment and/or practice of profession. The P250,000 reduction from taxable gross sales/receipts and other non-operating income is not applicable to mixed income earners since it is already incorporated in the first tier of the graduated income tax rates applicable to compensation income.

12. For Mixed Income Earner, the excess of the P250,000.00 over the actual taxable compensation income is not deductible against the taxable income from business/practice of profession under the 8% income tax rate option.

The total tax due shall be the sum of the tax due from compensation computed using the graduated income tax rates and the tax due from self- employment/practice of profession resulting from the multiplication of the 8% income tax rate with the total of the gross sales/receipts and other non- operating income.
 
Registration Information Update

13. Self-employed individual may signify the intention to elect the 8% income tax rate option by filing an Application for Registration Information Update (BIR Form No. 1905) at the beginning of the taxable year.

14. Self-employed individual availing the 8% income tax rate option shall still be registered with œPercentage Tax - Quarterly  tax type, and the 2551Q form type shall be end-dated. On the beginning of the following/each year, the
2551Q form type shall be automatically registered in the BIR registration system, to confirm that the taxpayer is subject to graduated income tax rates on the beginning of the year and required to file the quarterly percentage tax return, unless an application for registration information update to avail the
8% income tax rate for the said taxable year has been submitted to the concerned Revenue District Office or by selecting the 8% income tax rate option in filing the 1st Quarterly Percentage or Income Tax Return.

15. A Non-VAT individual taxpayer who availed of the 8% income tax rate and subsequently his cumulative gross sales and/or receipts exceeded the Three Million Pesos (P3,000,000.00) threshold during the taxable year shall be liable to pay income tax under the graduated income tax rates. The 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 8% income tax rate option. Taxpayer shall be required to update his/her registration immediately within the month following the month s/he exceeded the VAT threshold. Taxpayer shall automatically be liable to VAT prospectively starting the first day of the month following 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 of the taxable year or commencement of business/practice of profession until the time the taxpayer becomes liable to VAT.

16. A VAT-registered person whose gross sales and/or receipts for three (3) consecutive years did not exceed the amount of Three Million Pesos (P3,000,000.00), may update his registration from VAT to Non-VAT in order to qualify and avail the 8% income tax rate option, on or before the first quarter of a taxable year, following rules and regulations on registrations, updates, verification, and the inventory and cancellation of VAT invoices/ receipts.

III.  Procedures

A.   Self-Employed Individual Availing of the 8% Income Tax Rate

A.1 New Business Registrant

1.    Submit Application for Registration by accomplishing BIR Form No. 1901 to the concerned Revenue District Office having jurisdiction over the place of residence or where the Head Office is located, together with the complete documentary requirements.

A.2 Registration Information Update
 
accomplishing  BIR  Form  No.  1905  to  the  concerned  Revenue District Office where the self-employed individual is registered, together with the Certificate of Registration (COR) for replacement or updating.

(Note: The updating or replacement of the COR is only for the first time availment of the 8% income tax rate. There is no need to replace the COR in the succeeding years.)

B.   Revenue District Office - Client Support Section shall:

1. Receive the Application for Registration (BIR Form No. 1901) or Application for Registration Information Update (BIR Form No. 1905) of self-employed individuals availing of the 8% income tax rate option together with the COR.

2.   Validate if the taxpayer is qualified to avail of the 8% income tax rate option pursuant to Section II(4) of this Order.

3.   For existing taxpayers and new business registrants availing of the 8%
income tax rate option during registration of business:

3.1  Integrated Tax System

a.  Tag the 8% income tax rate option by selecting œ8% Income Tax
Rate  in the List of Values under the Special Code field;
b.  Add/Update  the  following  applicable  ATCs  in  the  1701  and
1701Q form types:

i.    II015 Business Income - 8% IT Rate;
ii.    II017 Income from Profession - 8% IT Rate; or iii.    II016 Mixed Income - 8% IT Rate

c.  Register tax type: Percentage Tax - Quarterly;
d.  Add form type 2551Q and applicable ATC;
e.  End-date form type 2551Q: filing end-date = 03/31/20xx or the last day of the applicable quarter, if the new business registrant registers after the first quarter.

3.2  Electronic  Tax  Information  System  -  Taxpayer  Registration
System

a.  In the Incentive Details Tab:

i.    Tag the 8% income tax rate option by selecting œ8% Income Tax Rate  in the List of Values under the Investment Promotion Agency;
ii.    Number of years = 1
iii.    Incentive end date = 12/31/20xx

b.  Add/Update  the  following  applicable  ATCs  in  the  1701  and
1701Q form types:

i.    II015 Business Income - 8% IT Rate;
ii.    II017 Income from Profession - 8% IT Rate; or iii.    II016 Mixed Income - 8% IT Rate

c.  Register tax type: Percentage Tax - Quarterly;
d.  Add form type 2551Q and applicable ATC;
e.  Suspend form type 2551Q: filing end-date = 03/31/20xx or the last day of the applicable quarter, if the new business registrant registers after the first quarter.

4.   Generate  COR  with  œPT   printed  on  the  face  of  the  certificate  and manually print the reminder at the bottom portion of the certificate:

œIf qualified and opted to avail of the 8% income tax rate, the filing of quarterly percentage tax return is not required for the current taxable year the option was made. 

5.   Release the new COR to the taxpayer.

C.   Information Systems Project Management Service (ISPMS)/ Information
Systems Development & Operations Service (ISDOS) shall: C.1 Integrated Tax System

1.    Add the œ8% Income Tax Rate option  in the List of Values under the
Special Code field.

2.    Create and run a script that will:

2.1 Automatically œend-date/suspend  the form type 2551Q when the individual taxpayers file the BIR Form No. 2551Q/1701Q and when the œ8% income tax rate  check-box is selected for the 1st quarter period and tag the œ8% income tax rate option  LOV under the special code field. This will remain suspended until the end  of  the  taxable  year.  The  tax  type  œPT   should  not  be removed in the Certificate of Registration when printed.
2.2 Automatically open the filing end-date or lift the suspension of
2551Q and remove the tagging of œ8% income tax rate option  LOV under the special code field, starting January 01 of the succeeding year, for all individual taxpayers who elected the 8% income  tax  rate  option  thru  manual  tagging,  filing  of  2551Q and/or 1701Q.
2.3 No stop-filer/open cases shall be generated for the 2551Q return for the taxable year when the 8% income tax rate option was made.

C.2 Electronic Tax Information System - Taxpayer Registration System

1.    Add the œ8% Income Tax Rate option  in the List of Values under the
Investment Promotion Agency field in the Incentive Details tab.

2.    Create and run a script that will:

2.1 Automatically   œsuspend    the   form   type   2551Q   when   the individual taxpayers file the BIR Form No. 2551Q/1701Q and when the œ8% income tax rate  check-box is selected for the 1st quarter period and tag the œ8% income tax rate option  in the List of Values under the Investment Promotion Agency field in the the taxable year. The tax type œPT  should not be removed in the Certificate of Registration when printed.

2.2 Automatically open the filing end-date or lift the suspension of 2551Q and remove the tagging of œ8% income tax rate option  in the List of Values under the Investment Promotion Agency field in   the   Incentive  Details  tab,   starting  January  01   of   the succeeding year, for all individual taxpayers who elected the 8% income  tax  rate  option  thru  manual  tagging,  filing  of  2551Q and/or 1701Q.

2.3 No stop-filer/open cases shall be generated for the 2551Q return for the taxable year when the 8% income tax rate option was made.

IV.  Transitory Provision

Pending the enhancement of the Electronic Tax Information System - Taxpayer Registration System, Revenue District Offices under Revenue Region No. 8 - Makati City shall use the Integrated Tax System in registration and updates of individuals availing of the 8% income tax rate option under Section III (B).

V.   Effectivity

This Order shall take effect immediately.