RA 9504: a form of tax relief

RA 9504: a form of tax relief

By Shirley S. Go

The issuance of Republic Act (RA) 9504 provided some form of tax relief, not only to the minimum wage earners, but also to other taxpayers.

Some of the highlights of this law and its proposed implementing regulations are summarized below:

1. Exemption from tax of the minimum wage earners. All minimum wage earners in the private and public sector shall be exempt 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 the minimum wage earners.

Prior to enactment of RA 9504, individual employees whose compensation income does not exceed the statutory minimum wage or P5,000 per month were exempted from withholding tax. Nonetheless, these were not exempted from income tax. Thus, the minimum wage earners whose compensation were not subjected to withholding taxes were still required to file annual income tax returns and pay the corresponding income tax due. RA 9504 grants minimum wage earners full tax exemption by exempting them from payment of income tax.

For this purpose, the minimum wage depends on the statutory minimum wage fixed by the Regional Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Employment Statistics of the Department of Labor and Employment. Regional Tripartite Wage and Productivity Boards of each region determine the wage rates in the different regions. The statutory minimum wage will depend on the region where the employee is working and not where he is residing.

2. Increase in personal and additional exemptions. RA 9504 increased the level of allowable personal exemption of each individual taxpayer to a uniform amount of P50,000 regardless of the status of the taxpayer. In addition, an additional exemption for each qualified dependent from P8,000-P25,000. Thus, the personal and additional exemptions for individual taxpayers are as follows:

The maximum number of qualified dependents remains at four. Since the new law took effect in July, the higher exemptions will only take effect beginning July 2008. For 2008, the taxable income will be separately computed for the period covering January to June and July to December. The January to June income will be allowed deductions equivalent to one-half of the old levels of personal and additional exemptions (e.g., half of P32,000 or P16,000 for married individuals). The July to December income will be entitled to half the higher levels of personal and additional exemptions (e.g., half of P50,000 or P25,000).

Before an employee can avail of this higher exemption, there is a requirement for general updating of tax status through the submission of BIR Form 2305 and the supporting documents in the prescribed form, as follows:

a. marriage contract certified by the National Statistics Office (NSO);

b. court decision of legal separation;

c. birth certificate of each qualified dependent brother, sister or child, certified by the National Statistics Office (NSO) or by Local Civil Register Office or passport as certified by HR Officer;

d. certificate of employment of the husband if he is working abroad;

e. waiver of exemptions of children by the husband in case wife is claiming the additional exemptions of the children;

f. waiver from exemption on withholding tax of taxpayers whose total compensation income in a year does not exceed P120,000.00;

g. medical certificate of dependent brother, sister or child, if physically or menta lly incapacitated;

h. court decision of legal adoption of children;

i. death certificate certified by the Local Civil Registry Office /NSO;

j. current certificate of income tax exemption of qualified senior citizen; and

k. other documentary evidence, where the above documents are not available.

The deadline for submission of the form to the BIR is October 31, 2008.

3. 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 enumerates all his expenses and the corresponding amounts incurred. The option can be availed of on an annual basis and shall be irrevocable for that taxable year.

Aside from increasing the OSD of an individual engaged in business and practice of profession from 10% to 40% of gross sales or gross receipts, RA 9504 allowed corporations the option to avail of the OSD at 40% of gross income. Previously, corporations were only allowed to claim itemized deductions in computing their taxable net income.

RA 9504 is already effective and there is no reason why employers should not already apply it in the computation of the taxes due from their employees. Some employers though are still cautious in applying it in the absence of the implementing regulations. We hope that these regulations will be issued soon so that the intended benefits to the affected employees will be realized.

(The author is a tax manager at Punongbayan & Araullo, member of Grant Thornton International. For comments and inquiries, please e-mail the author or call 886-5511.)