Cue the new 1701Q

The past few months have seen a myriad of changes in politics, economics, finance and taxation. While some perceive these changes to be progressive and beneficial, others are more skeptical.

One significant change in the individual taxation field these recent weeks is the newly revised BIR Form 1701Q also known as the Quarterly Income Tax Return for Individuals, Estates and Trusts which was circularized by the Bureau of Internal Revenue (BIR) in Revenue Memorandum Circular (RMC) No. 32-2018. The revision is in line with the initiative to streamline and simplify the tax filing process pursuant to the Tax Reform for Acceleration and Inclusion (TRAIN).

For those unfamiliar with BIR Form 1701Q, this tax return is for quarterly filing by individuals who are engaged in business or practice a profession in the Philippines, and persons acting in any fiduciary capacity (i.e. trustees, guardians or executors/administrators) for a trust, estate, or minor.

What are the notable changes in the Revised BIR Form 1701Q?

Previously, taxpayers required to file BIR Form 1701Q only had to accomplish a one-page return; however, they are now required to fill out two pages. The additional page accommodates the numerous inclusions and changes in entries. Taxpayers may feel some level of unease and uncertainty in accomplishing the new form for the first time. To avoid errors and potential issues with the BIR, taxpayers may seek advice from the BIR-Customer Assistance Division or tax consultants/specialists should they have questions after reviewing the guidelines.

Aside from the additional page, another noteworthy change is the option for taxpayers to either be taxed at graduated rates from 0% to 35% or at a flat rate of 8%. The 8% gross income tax option is one of the salient amendments in TRAIN pertaining to individual taxation, which essentially provides those within a certain earnings threshold the discretion to be taxed at a significantly lower rate.

Other changes in the return pertain to the inclusion of additional sections vis-a-vis foreign tax credits, foreign tax number and specification of non-operating income, among others.

How do I elect to be taxed at the 8% flat rate?

The option to be taxed at either the graduated tax rates or 8% flat rate is only available to taxpayers earning aggregate gross revenue or receipts and non-operating income not exceeding the value-added tax (VAT) threshold of P3,000,000. Taxpayers with revenue above the VAT threshold will automatically be subject to the graduated tax rates plus 12% VAT, even if the 8% flat rate was initially selected.

Presumably, taxpayers with revenue below the VAT threshold would most likely elect the 8% flat rate as a more advantageous option that would generate tax savings. However, in cases where they opt to be taxed at the graduated rates or are deemed subject to graduated rates by failure to properly signify their intention to be taxed at 8%, then they will also be subject to 3% percentage tax on top of the income tax.

What is critical in availing of the 8% flat rate is establishing the clear intention to elect this option. Pursuant to Revenue Memorandum Order (RMO) No. 23-2018 and RMC 32-2018, the taxpayer must signify his intent to be taxed at the 8% tax regime through any of the following ways:

A. New Business Registrants

(1) Upon registration, by filing BIR Form No. 1901 or Application for Registration; and

(2) Checking Item No. 13 in BIR Form No. 2551Q or Quarterly Percentage Tax Return and/or Item No. 16 in BIR Form No. 1701Q on the initial quarter returns after the commencement of the business.

B. Existing Business Taxpayers

(1) Filing BIR Form No. 1905 or Application for Registration Information Update to either de-register for VAT (for VAT-registered taxpayers) or end-date percentage tax registration (for Non-VAT registered taxpayers); and

(2) Checking Item No. 13 in BIR Form No. 2551Q and/or Item No. 16 in BIR Form No. 1701Q.

It is also of paramount importance to follow the proper timing in the election of the 8% flat rate. Under Revenue Regulations (RR) 8-2018, the taxpayer is required to signify his intent in the first quarter return (BIR Form 1701Q and/or BIR Form 2551Q) for existing business taxpayers, or on the initial quarter return of the taxable year after commencing a new business or practice of profession for new business registrants. Otherwise, he is considered as having availed of the graduated rates of income tax.

Such election is deemed irrevocable for the taxable year. Once the taxable year ends, the taxpayer is again required to elect his tax rate for the next taxable year. Thus, taxpayers who prefer to continue the 8% tax rate must annually signify their intention to elect the flat rate option in their first quarter returns.

What can I do if I file the old version of BIR Form 1701Q?

Based on RMC 32-2018, taxpayers who have manually filed and paid their first quarter 1701Q using the old version of the form are still mandated to file the new and revised 1701Q as an amended return. The amended return will be the basis of the BIR in determining whether qualified taxpayers have elected to be taxed at the 8% flat rate option instead of the graduated rates.

Any tax payments using the old form should be indicated in Item No. 59 (Tax Paid in Return Previously Filed, if this is an Amended Return) of the newly revised Form. If the amendment results in additional income tax liability due to the change in the tax regime, then taxpayers should settle the outstanding balance and applicable penalties (i.e. 12% deficiency interest per annum and 25% surcharge), if payment is made after the filing deadline. For no payment or overpayment, however, the existing procedure for “No Payment Return” should be followed, that is, through the use of the eBIRForms platform of the BIR.

As these changes develop with reforms under way, the BIR should be lauded for its incessant efforts in ensuring that the TRAIN runs as smoothly as possible. While some may contend that the reforms impact us adversely, from an overall view, the reforms are necessary and beneficial because there can be no growth without change. It is my sincere hope, however, that the proposed and implemented changes in the current and future tax reform packages ultimately result in the betterment and benefit not just of the taxpayers, but also the Philippine economy at large.