What’s In and What’s Out in 2023?

As featured on PhilStar: What’s in and what’s out in 2023?

Each new year is an opportunity for a fresh start and new beginnings. Regardless of what your goals are or how many resolutions you plan to make for 2023, ringing in the new year is a moment to be acknowledged and must be welcomed with a cordial reception. The year 2023 has officially begun, and it is but right to start the year equipped with the latest updates on taxation so that taxpayers may be guided. This year, there are fresh updates on tax rules that took effect, and some are bound to conclude.

For this year, we will see various changes in our tax system brought by the Republic Act (RA) No. 10963, also known as Tax Reform for Acceleration and Inclusion (TRAIN) Law, and RA No. 11534 or the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law.

Firstly, under the TRAIN Law, individual taxpayers with annual taxable income amounting to PhP250,000.00 or below are still exempt from paying income tax, while the rest of taxpayers, except those with taxable income of more than PhP8,000,000.00, will have lower tax rates ranging from 15% to 30%, previously 20% to 32%. On the other hand, to maintain a progressive form of taxation, the imposition of an income tax rate of 35% has been maintained for individual taxpayers whose annual taxable income exceeds PhP8,000,000.00.

The income tax shall be computed based on the following schedules effective 1 January 2023 and until further amendments to the law are made:

Annual income:

•      Not over PhP250,000.00 - None (zero percent)

•      Over PhP250,000.00, but not over PhP400,000.00 - 15 percent of excess over PhP250,000.00

•      Over PhP400,000.00, but not over PhP800,000.00 - PhP22,500.00 plus 20 percent of excess over PhP400,000.00

•      Over PhP800,000.00, but not over PhP2,000,000.00 - PhP102,500.00 plus 25 percent of excess over PhP800,000.00

•      Over PhP2,000,000.00, but not over PhP8,000,000.00 - PhP402,500.00 plus 30 percent of excess over PhP2,000,000.00

•      Over PhP8,000,000.00 - PhP2,202,500.00 plus 35 percent of the excess over PhP8,000,000.00

Compared to the rates imposed at the initial implementation of the TRAIN Law in 2018, the new income tax rates for individuals have been decreased by 5% for those with taxable income of more than PhP250,000.00 up to PhP2,000,000.00, while a 2% decrease in the tax rate for those individuals with taxable income of more than PhP2,000,000.00 up to PhP8,000,000.00.

Secondly, pursuant to Section 2 of Revenue Regulations (RR) No. 13-2018, the regulations implementing the Value-Added Tax (VAT) provisions of Train Law, starting 1 January 2023, the filing and payment of VAT returns shall be done on a quarterly basis. The filing of monthly VAT returns (BIR Form No. 2550M) will no longer be required, and VAT taxpayers will only need to file four (4) Quarterly VAT returns (BIR Form No. 2550Q) within 25 days following the close of each taxable quarter. This is a relief granted to VAT-registered persons from the burdensome of filing numerous tax returns within a taxable year.

Meanwhile, the CREATE Law was enacted to aid taxpayers from the undue effects of the COVID-19 pandemic by lowering the taxes of certain taxpayers. This 2023, these certain taxes would revert to their original tax rate.

Firstly, according to Section 116 of the Tax Code, as amended, any person whose sales or receipts are exempt under Section 109(CC) of the Code from the payment of VAT and not a VAT-registered person shall pay a tax equivalent to 3% of his or her gross quarterly sales or receipts. Under CREATE Law, the 3% percentage tax was lowered to 1% beginning 1 July 2020 until 30 June 2023. Thus, effective 1 July 2023, taxpayers must pay the original tax rate of 3%.

Secondly, under CREATE and RR No. 5-2021, the Minimum Corporate Income Tax (MCIT), was lowered to 1% effective 1 July 2020 to 30 June 2023. This means that starting 1 July 2023, the MCIT for corporations (except non-profit proprietary educational institutions and hospitals, and non-resident foreign corporations) will now revert to its original 2% rate based on the gross income of such corporations.

Lastly, under CREATE, the 10% income tax for Non-Profit Proprietary Educational Institution and Hospitals was also reduced from 10% to 1% effective 1 July 2020 to 30 June 2023, with the qualification that their gross income from unrelated activities shall not exceed 50% of their total gross income. Starting 1 July 2023, the tax rate for such institutions will return to the higher 10% again.

In view of the foregoing, these may be perceived as a mixture of good news and bad news. Taxpayers may treat the rules on lowering income tax rates and reducing the number of VAT returns to be filed as good news and a welcome development to our tax system. On the other hand, the return to its original tax rates of previously lowered rates pursuant to the reliefs offered by CREATE Law which will expire by mid-2023 may be frowned upon and as 30 June 2023 approaches, we can expect that there may be taxpayers that will request for an extension until they fully recover from the adversities of the pandemic.

Knowing the "ins" and "outs" of our tax laws can help taxpayers calibrate their actions and plans throughout the year. Truly, it pays to be knowledgeable of the updates on our tax system.