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Tax exemption of minimum wage earners

Tax exemption of minimum wage earners and other tax relief


The President signed into law on June 17, 2008 Republic Act No. (RA) 9504 granting additional tax relief to individuals and corporations, as follows:

1. Exemption of minimum wage earners

The new law exempts minimum wage earners in the private and public sector from payment of income tax.  The exemption will cover not only the basic pay but also holiday pay, overtime pay, night shift differential, and hazard pay received by said minimum wage earners.

Prior to enactment of RA 9504, individual employees whose compensation income does not exceed the statutory minimum wage or five thousand pesos (P5,000) per month were exempted from withholding tax under Revenue Regulations No. 01-06. The law grants minimum wage earners full tax exemption by exempting them from payment of income tax. 

2.  Increase in personal and additional exemptions

RA 9504 increases the level of personal exemption allowance of each individual taxpayer to a uniform amount of P50,000 regardless of the status of the taxpayer, and additional exemption allowance for each qualified dependent from P8,000 to P25,000, as follows:

                                   Old Law      New Law    Increment

Single individuals         20,000       50,000       30,000
Head of family              25,000       50,000       25,000
Married individuals       32,000       50,000       18,000
Additional exemption
for each qualified
dependent/child             8,000       25,000       17,000

The maximum number of qualified dependents remained at four.

2. Optional Standard Deduction (OSD) for corporations and increased OSD for individuals

The OSD is a scheme whereby a taxpayer is given the option to deduct from his gross revenue or gross income a lump sum equivalent to a percentage of such gross revenue or gross income for purposes of computing the net taxable income on which the income tax rate will be applied.   This is in lieu of the itemized deduction scheme where the taxpayer lists down all his expenses and the corresponding amounts incurred to determine the amount of allowable deductions.  The option can be availed of on an annual basis and shall be irrevocable for that taxable year.

The 10% OSD allowed to an individual engaged in business and practice of profession was increased to 40% of gross sales or gross receipts. 

Furthermore, corporations are now given the option to avail of the OSD at 40% of gross income. Previously, they were only allowed to claim itemized deductions in computing their taxable net income.

The law shall take effect on July 7, 2008, 15 days after its publication in Malaya and Manila Bulletin newspapers on June 22, 2008. The new law shall be effective starting taxable year 2008.  A revenue regulations will be issued by the BIR to implement the adjustment in the withholding taxes.

The BIR has already exposed for public hearing a draft revenue regulations to implement the withholding of income on compensation following the amendments in the law.  For your reference and guidance, you may download the attached copy of the draft regulations and withholding tax table.  A printable version of this Alert is also available.