I know the subject of taxation isn’t exactly an exciting subject to most of us, but it is an important one to understand and get right. Having a good understanding of the VA tax obligations in the country where you plan on setting up as a freelancer is a great place to start for any budding VA. When you start up a VA business in the Philippines, the first thing that you really need to look into is ensuring that you are set up legitly. If you are not set up through the taxation system properly it will lead to you having real problems down the line which are easily avoidable with a bit of time and effort in the beginning.
What You Should Know About VA Tax Obligations and Registration
Sole Proprietor or Professional
First of all, you need to think about if you want to be a sole proprietor or a professional? The vast majority of freelancers in the Philippines appear to register themselves as a professional. There are some differences between the two, as you would expect on how you run and register.
The one major reason to register as a sole proprietor is if you want to scale your business and build a team, as this option does make this easier. You can also do this as a professional, but you would need to hire your team as subcontractors instead of employees, so you are not responsible for paying their government contributions or taxes.
Registering with the BIR
Freelancers who are working via the internet in the Philippines must register with the Bureau of Internal Revenue (BIR) who are the central governing body within the Philippines which is responsible for all tax policies, documentation, and compliance.
Those that are self-employed and receiving an income from their profession need to ensure that they comply with the new digital models for freelancers. There are some reasons that you can be exempt from taxation, but please ensure you get up to date advice on this. The reasons are as follows;
- If you are earning the minimum wage.
- If your gross income is below the Basic Personal Exemption (Php 50,000, regardless of marital status) and Additional Personal Exemption (Php 25,000 per child dependent with a maximum of 4).
- If your annual salary is either Php 60,000 or below.
(SOURCE: https://www.taxumo.com/freelance-tax-philippines/ Date accessed: 11/10/19)
To become a fully registered freelancer you need to acquire a Taxpayer Identification Number (TIN). This is the number which will relate to all your accounting matters. The BIR now has an operational e-registration system where you can apply to get your number online. There is a registration fee of Php 500 which is applicable each year and can be paid either online or through an Authorized Agent Banks (AABs) at a convenient location for you. Once you have made the payment you need to attend your nearest BIR office to receive your TIN Card. You need to have this card to start the process of registering as self-employed / freelancer.
The requirements for tax registration are as follows for freelance registration:
- Occupational Tax Receipt (OTR) / Professional Tax Receipt (PTR)
- PRC License (if Licensed Professional
- Barangay Clearance
- Form 1901 (3 Copies)
- Form 1905 (3 Copies) - If applicable
- Form 0605 (3 Copies)
- Clear Scanned copy of Birth Certificate
- Marriage Certificate (If Applicable)
- Proof of Billing
- 3 Copies of 2 Valid IDs
- Title of Property OR Lease Contract
- Copy of Client/Project Contract
- 3 Original Signed Copies of Special Power of Attorney (SPA)
- Letter of Intent in Registering as a Freelancer / Professional
(SOURCE: WEBINAR with Atty Nelson Kevin Baldonado Date accessed: 11/10/19)
Before you look at completing your certificate of registration which will be issued by the BIR there are a couple of things that you need to understand.
Income tax, which is a tax levied on the income earnt, so you need to decide what type of income tax you will be subject to paying.
There are two options of income tax rates you can choose from:
1. Graduated Income Tax Rate
The income tax due is based on your net taxable income. The calculation of rates is shown in the table below.
If you go for the Graduated Income Tax Rate, your gross expenses will be based on whichever type of deduction you choose below:
This is when you have expenses that you will have paid out for in order to provide the service that you do. With this type of tax deduction, you will need to keep all your receipts on record for your business expenses. These expenses are then deducted off your gross income which lowers your taxable income.
B. Optional Standardised Deduction
This is the option to choose if your business expenses are less than 40% of your gross income as 40% is automatically deducted from your gross income.
2. 8% Flat Income Tax Rate
This option is available to non-VAT registered individuals whose gross sales/receipts for the year does not exceed P3,000,000. Income tax is calculated by getting 8% of your gross sales.
(SOURCE: https://www.bir.gov.ph Date accessed: 11/10/19)
Freelancers in the Philippines are considered self-employed professionals, earning personal income from businesses. This means they are also subject to paying Business Tax.
VAT or Percentage Tax System
You need to think about if you will want to go through the percentage tax system or VAT. You can opt-out of VAT if you are earning under 3 million per year and therefore you need to use the percentage tax system which only requires you to pay 3% of your gross annual sales.
Lastly, your Philippine Annual Income Tax Return (BIR Form 1700) needs to be filed and taxes are due to the Philippine Bureau of Internal Revenue on or before the 15th April. The tax year in the Philippines is a calendar year which ends 31st December of each year.
After taking all this information in and processing it just remember that the advantages of getting your taxes in order from the start as a freelance VA are:
- You will have a better chance of getting loans approved i.e. house, car etc.
- It is one of the requirements for a VISA application.
- The most important point is that it will avoid you getting tax penalties.
As we are not accountants, tax or legal experts the advice in this article is for information and advice only. Please seek your own independent legal and professional taxation advice from a qualified accountant.
Well, I hope this guide to taxation in the Philippines didn’t scare you too much, relieves any worries that you had and encourage you to start freelancing as a VA.