Updated as of May 29, 2023
With the start of a fresh new year and the opportunity to set new goals, a 2023 personal income tax rates adjustment on income taxation 2023 will also be made that may alter your lifestyle during the tax calendar and tax deadlines months, this income tax bracket 2023 offers new computations on your previous tax deductions in whatever region you are in the country. According to the Bureau of Internal Revenue, also known as BIR, individuals or an employee earning non-profession-related salaries and sole proprietors earning salaries are likely to have higher take-home pay this year. Nevertheless, let us explore the good and bad effects that will be taken this taxable year into this segment of your annual income tax.
But before we begin, we’ll first cover some basic questions regarding income tax and income tax calculation for the sake of those who are unfamiliar with the concept itself. To the people who already know the fundamentals of this topic, feel free to skip to the latter half of the article.
What is Income Tax and Its Purpose?
To put it simply, income tax refers to any tax which is demanded by the government from the earnings/profit (taxable income) of eligible taxpayers for the purpose of funding government projects, public services, etc.
As mentioned, income tax comes in many forms (which will be further expanded upon later in this article), and are often directly proportional to the income of the individual or party. Upon collection by the government, it is then used to improve or fund a variety of preexisting public or to create new ones for the betterment of the people. If income tax were to be abolished, it would lead to deficiencies in government funds, resulting in a widespread reduction of the quality of life for the citizens of the government. Thus, in terms of purpose, income tax is an integral part of a functioning community.
Who is Required to Pay Income Tax in the Philippines?
The target demographic of the income tax Philippines is primarily resident citizens. This form of tax does apply however to non-resident citizens and aliens who own an income source in the country.
To go into more detail about the type of income source that gets taxed for resident citizens, it is their worldwide income that gets reduced. Worldwide income encompasses both revenues that are sourced within the Philippines and outside of it. While all resident citizens, non-resident citizens, and foreigners who own a business in the Philippines are obligated to pay their income tax, there are some exceptions to this rule.
Who Does Not Pay Income Tax in the Philippines?
Resident citizens who are only making minimum wage are not required to pay income tax, as well as offshore Filipino workers (OFWs) and aliens whose income comes from abroad.
The purpose of the first condition is to ensure that those who are living off the minimum wage are still capable of providing for themselves the minimum standard of living afforded to Filipinos. As for non-resident citizens who make their income out of the country, it would make sense that they would not be subject to pay the Philippines’ income tax, instead giving their share to the nation they are presently working. The same idea applies to aliens as well.
How Much is the Income Tax in the Philippines?
Compared to the previous two years, the personal income tax rates in the Philippines have faced a significant reduction due to the implementation of the TRAIN Law.
Brought into being during the Duterte administration in 2017, the Tax Reform for Acceleration Law’s primary objectives were to promote economic growth, stifle inflation, and generate more jobs for the sake of revitalizing the Philippine economy and bringing thousands of unemployed Filipinos back into the fold. The effects of this law led to the reduction of the rate of personal income tax while subsequently increasing consumption tax. For a more comprehensive look into the changes brought by the TRAIN Law to the current income tax rates for 2023, proceed to read more below.
Without further ado, here’s everything you need to know about the different types of taxes in the Philippines, the 2023 income tax changes, and how they could affect real estate in the Philippines.
TRAIN Law
In order to make the tax system more transparent, equitable, and effective for taxpayers, TRAIN Law, or the Tax Reform for Acceleration, aims to address a number of flaws of individual income tax so you would really need a tax calculator to check how much you will spend.
As the first of the four ‘packages’ of tax reforms meant to induce significant alterations to both personal income taxes and consumption taxes, the TRAIN Law was enacted to achieve not only the simplification of the tax system but to attain specific goals as well. According to the Duterte Administration, these objectives were: to make the Philippines a high-income country, deal with extreme poverty, and make institutions that are inclusive and capable of providing equal opportunities for all.
In addition, the TRAIN Law was not only meant to improve the lives of everyday working Filipinos but to attract foreign investors as well for the sake of securing more wealth. The inclusion of outside funding would not only aid the government’s efforts to secure revenues for the acceleration and inclusion of new public programs but to create new job openings as well.
Regardless of the other details about the TRAIN Law, we’ll be looking at its main attraction point below.
Individual taxpayers’ taxable income is anticipated to decrease further during this year, 2023, leading to better take-home pay for individuals as a result of the Tax Reform.
The New Income Tax Table 2023 Philippines
Lower withholding tax deductions from residents’ and non-resident aliens’ monthly paychecks due to receiving purely compensation income would result in increased take-home pay, as was already mentioned.
A new set of income tax rates will be applied as of this month, January 2023, and onwards. Those earning less than P20,833.33 will still be exempted from paying personal income tax.
Taxpayers whose monthly income is P20,833 up to P33,332 are to withhold a tax of 15 percent from the previous withholding of 20 percent from their taxable income.
Taxpayers with monthly incomes between P33,332 and P66,666 must pay a total of P1,875 in taxes plus an additional 20 percent of their taxable income. The previous tax from 2018 to 2022 was calculated as P2,500 plus 20 percent of taxable income.
Taxpayers whose monthly income is between P66,667 and P166,666 will pay a total tax of P8,541.80 plus an additional 25 percent of their taxable income. The previous tax was calculated as P10,833.33 plus 30 percent of taxable income.
Taxpayers who receive a monthly income of P166,667 up to P666,666 will pay a total of P33,541.33 plus an additional 30 percent of their taxable income. The previous tax was calculated as P40,833.33 plus 32 percent of their taxable income.
However, those taxpayers who earn more than P666,666 a month will be given an additional withholding tax rate of 3 percent.
Likewise, they must now pay a total of P183,541 plus another 35 percent of their taxable income. This year’s tax was higher than the previous year’s, at P200,833.33, plus an additional 32 percent of their taxable income.
VAT Return
This year was also put into relief to VAT-registered companies and individuals. At the start of the year 2023, the BIR Form 2550M, also known as Monthly Value-Added Tax Declaration, will no longer need to be filed and paid; instead, four annual VAT returns or quarterly VAT returns should be filed in lieu of the usual twelve (12) returns. It will continue to be payable for 25 days after the end of each taxable quarter. It is favorable since it will give registered entities plenty of time to collect all the evidence they need to support their claim for input VAT, which is precisely what the taxpayer is doing. A longer grace period for VAT returns would mean a more lenient system that can reduce the risk of potential mistakes that can occur during this process.
Reverting Reduced Tax Rates
During the year peak of COVID-19, the implementation of Corporate Recovery and Tax Incentives for Enterprises, otherwise known as the CREATE Act, in the year 2021 aimed to address the varying needs of the business sectors brought on by the pandemic by offering tax relief. The CREATE Act is anticipated to cease and restore the previous tax rate state this year since the nation is gradually recovering from the pandemic’s devastation. Here are some of the tax rate changes that previously came from CREATE Act:
Minimum Corporate Income Tax (MCIT)
The Minimum Corporate Income Tax was lowered by 1 percent and is effective until June 30, 2023. With the exception of non-profit proprietary educational institutions, hospitals, and non-resident foreign firms, corporations will henceforth be liable to the original rate of 2 percent based on their gross income starting July 1, 2023.
Special Income Tax Rate for Non-Profit Proprietary Educational Institutions and Hospitals
Under the CREATE Act, the proprietary educational institutions and hospitals also reduced the rate from 10 percent down to 1 percent. Starting July 1, 2023, these corporations will be subject again to a 10 percent of tax rate. Such educational institutions or hospitals should be required to pay regular income tax/paying income tax on their taxable income subject to irrelevant business activity that contributes to more than half of their total gross income,
Percentage Tax for non-VAT taxpayers
Under the CREATE Act, the 3 percent charge on individuals who do not register for VAT because their yearly sales or receipts do not surpass the P3,000,000 VAT threshold has been reduced to 1 percent. However, starting on July 1, 2023, the tax rate will be reverted again back to 3 percent.
With the CREATE Act still in the process of steadily applying its changes, it has yet to be seen if its efforts have been positive as predicted, or detrimental due to the presence of known or unknown harmful variables.
Mandatory Government Contributions
Aside from the taxes and tax rate mentioned above, there will also be an increase in mandatory government contributions such as Philhealth and Social Security System (SSS) contributions this year. The premium rate for Philhealth will increase from 4 percent to 4.5 percent. The rate for SSS contributions will increase from 13 percent to 14 percent, whereas the employer’s part of an employee’s SSS contribution will also increase pay from 8.5 percent to 9.5 percent.
The implications of these changes would mean the provision of a greater degree of insurance to the employees of a corporation or government workers. Higher contributions from the government would noticeably benefit the preexisting advantages provided for workers, leading to a better safety net for the said parties in the event of disasters, health problems, and other potential issues.
Even though some adjustments have reduced the tax rate and income taxes that are taxable, we should however be aware of how inflation and other costs of living are putting a strain on us. For instance, these tax changes might have had an impact on real estate in the Philippines. Hence, it would be wise to do some study or turn to the expertise of a professional in this field before deciding whether or not there would be capital gains in this year’s outcomes.
While these changes to how income tax functions in the country were done for the purpose of alleviating many of the economic issues we face as a people, there would be some efforts that would simply backfire and lead to the formation of obstacles rather than aid.
After all, these days, tax changes might be tedious and complex, but it is still necessary for taxpayers to be aware of and comprehend these changes in order to be responsible citizens of the country.
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