Ask Me Anything About Philippine Taxation! 11.May.2020

[mynameisabby]

Hi! I am a CPA specializing in Philippine Taxation. I created this AMA to help Filipino business owners and investors understand the effects of taxation on their financial decisions. Also, to promote our subreddit.

Importance of taxation​

1. Effect on investment income

- Financial advisors will feed you forecasts with rates that may be prudent but are still gross of tax. Knowing the effects of taxation may make or break your decision to invest.

For example:

Bank Deposit of 1,000,000PhP

10% interest income annually

Maturity of 1 year = wherein the investment, together with its income is invested 4 more times, will be 1,610,510 in 5 years.

Maturity of 5 years = wherein the investment will be invested for 5 straight years will also be 1,610,510 after maturity.

In the above case, the yield is the same but if taxation is taken into account then:

Investment with 1 year maturity = investment after 5 years = 1,469,368

Investment with 5 year maturity = investment after 5 years = 1,610,510 due to tax exemptions.

Year
Interest Income
Tax (20%)
Running Balance

0
-
-
1,000,000

1
100,000
20,000
1,080,000

2
108,000
21,600
1,166,400

3
116,640
23,328
1,259,712

4
125,971
25,194
1,360,489

5
136,050
27,210
1,469,328

As you can see, understanding the laws of taxation is crucial in making financial decisions because the tax will increase your overall cost. Lowering your tax or even avoiding it legally will certainly help you gain more money.

1. Effect on business income

- Becoming a business owner or a professional has its perks like an increase in money-making opportunities. However, your obligations also increase as compared to when you were an employee.

For one, an employee enjoys the benefit of substituted filing, this means that their employer will be the one to file and pay the employee's taxes. As a self-employed individual, you are now required to know the relevant tax laws, file your tax returns on time, and maintain documents in order to be compliant with the laws. This means that you need to invest in studying the laws or hire someone who could manage this side of the business, entailing another set of expenses.

1. Penalties

- ignorance of the law excuses no one. Failure to pay your taxes on time, failure to register your business when you need to, or outright disregard for compliance are the common reasons why Filipinos have cases with the BIR.

The following are common penalties faced by business owners and investors:

a. Failure to register business - 2,000 to 20,000 pesos

b. Failure to keep/preserve records required by law or regulations - 1,000 to 50,000 pesos

c. Failure to make/file/submit any return or supply correct information at the time or times required by law or regulation - 1,000 to 25,000 pesos plus surcharge and interest.

Registration​

1. Should I register as a business/professional?

- If you are regularly earning income from sources that do not come from an employer then yes, you need to register as a business/professional. An exemption to this is when all your income has already been withheld by an organization (e.g. Dividend income or gains from stocks)

1. Applying for tax exemptions

- If you are qualified, you may opt to apply for tax exemption under BMBE Law.

Filing and Payment​

1. How do I know which tax returns I should file?

- Every tax type that is written in your Certificate of Registration must be filed on time.

1. Should I file even if there is no tax payable?

- Yes. They are called no payment returns.

1. How do I file my tax returns?

- You may call your RDO or consult a professional. You may also learn about the process using the following links:

a. Annual Income Tax Returns = https://www.bir.gov.ph/images/bir_f...ons_2/RMCs/2018/Annexes B1-B5_RMC 24-2018.pdf

b. BIR Form 1701Q = https://www.bir.gov.ph/images/bir_files/internal_communications_2/RMCs/2018/1701Q Guide Jan 2018.pdf

c. BIR Form 2551Q = https://www.bir.gov.ph/images/bir_f..._2/RMCs/2018/RMC 26-2018/2551Q_guidelines.pdf

d. BIR Form 2550M = https://www.bir.gov.ph/index.php/tax-information/value-added-tax.html#vtmonthly

e. BIR Form 2550Q = https://www.bir.gov.ph/index.php/tax-information/value-added-tax.html#qvat

f. BIR Form 1601EQ = https://www.bir.gov.ph/images/bir_f...ations_2/RMCs/2018/1601-EQ Guide Jan 2018.pdf

g. BIR Form 1601FQ = https://www.bir.gov.ph/images/bir_f...ations_2/RMCs/2018/1601-FQ Jan 2018 Guide.pdf

h. BIR Form 1601C = https://www.bir.gov.ph/images/bir_f...ations_2/RMCs/2018/1601C Jan 2018 Annex C.pdf

i. BIR Form 0619E = https://www.bir.gov.ph/images/bir_f...ns_2/RMCs/2018/0619-E Jan 2018 Guidelines.pdf

j. BIR Form 0619F = https://www.bir.gov.ph/images/bir_f...ns_2/RMCs/2018/0619-F Jan 2018 Guidelines.pdf

 

[lazuli]

@mynameisabby Hi, thank you for this!

Several of us are planning to invest in the S&P 500, but we are local Filipinos living in Manila.

One option is to open an account with a foreign broker (ex: TD Ameritrade/ TradeStation/Charles Schwab) to buy an S&P 500 ETF.

Question 1: Once we sell the ETF through the foreign broker, do we need to declare the gains in the ITR here in the Philippines?

Another option is to invest in a local feeder fund that invests in the S&P 500 (ex: BPI US Equity Index Feeder Fund)

Question 2: Once we sell and withdraw from this feeder fund, do we need to declare the gains in the ITR here in the Philippines?

 

[mynameisabby]

@lazuli Hi!

Sorry for the delay. I had connection issues right after I posted.

Q1: Yes, this forms part of your other income to be taxed under graduated rates.

Q2: Yes. As per my understanding, those foreign fund holder does not withhold on your behalf.

 

[resjudicata]

@mynameisabby Maybe a dumb question, will they ever know if you do not declare income from foreign brokers?

 

[mynameisabby]

@resjudicata Maybe. Maybe not. The risk of getting caught increases as you become more high profile.

 

[pentecostal1ness]

@mynameisabby

Q2: Yes. As per my understanding, those foreign fund holder does not withhold on your behalf.

Clarification on this one, isn't it covered by taxation of mutual funds? You are technically investing in fund setup by the local company who then does the investment into the forieng fund/ETF.

 

[mynameisabby]

@pentecostal1ness If they are using revocable trust funds as a driver then it's most probable that they do not withhold on their client's behalf. Nasa disclaimer naman yan ng fund.

 

[pentecostal1ness]

@mynameisabby Thank you for this.

 

[lazuli]

@mynameisabby Thanks for your replies!

Would you know if that particular fund,
BPI US Equity Index Feeder Fund
is a revocable trust fund or not?

 

[mynameisabby]

@lazuli I'm sorry, I am not sure. You can call BPI if you want. Ask them if they withhold taxes on behalf of trustees of the BPI UEIFF.

 

[lazuli]

@mynameisabby Thank you!