Regarding independent consultants

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Taxwise Or Otherwise

IN THE CURRENT WORLD of advanced technology, when work can be done wherever you are at a time most convenient to you in the most efficient way, more and more people are now deciding to leave their eight-hour office jobs and start working for themselves as independent consultants.  Undeniably, such a set-up would normally give them benefits they cannot otherwise have as employees — from having more time for themselves and their families to saving more money.

Unfortunately, some don’t know the various government registration requirements they need to comply with before they can fully operate as independent consultants.

In the World Bank Ease of Doing Business 2018 survey, however, the Philippines ranked 113th among 190 economies — an unpleasant reflection of how tedious the registration process for a new business is. The process includes dealing with various government agencies separately such as, the Bureau of Internal Revenue (BIR), Office of the City Mayor, Department of Trade and Industry (DTI), and Social Security System, to name a few. The good news for small businesses is that, through Republic Act No. 10644, also known as the Go Negosyo Act, the government has established Negosyo Centers to promote ease of doing business and facilitate access to services for Micro, Small Medium Enterprises (MSME), by way of business registration and business advisory services. Having said that, people still tend to neglect their responsibility to register their new businesses.

Nonetheless, this article is not about the pros and cons of being an independent consultant or practicing your profession. Instead, I would like to share information on the basic registration and compliance requirements for those who have weighed them already and are now looking to venture out on their own.

For sole proprietors, the DTI requires registration as a first step to secure the right to use a business name. In relation to this, Negosyo Centers may be found in the DTI that can assist the registrants with their registration requirements with the different government agencies.

Under the Philippine Tax Code, any person who is required to make, render or file a return, statement or other documents, whether natural or juridical, shall secure a TIN from the relevant BIR Revenue District Office (RDO) having jurisdiction over the business address (or place of residence of the taxpayer, in the absence of a business address).

In case a TIN has already been issued from previous employment, the individual no longer needs to secure another TIN.  However, the registration status needs to be updated with the BIR as self-employed, as well as the RDO, depending on the registered address.

Note that acquisitions of multiple TINs is a criminal offense and shall be subject to penalties and/or imprisonment.

Upon updating the registration with the BIR as a self-employed person, certain documentary requirements have to be submitted. The BIR requires the taxpayer to maintain books of account where all the transactions should be recorded. Businesses whose quarterly sales, earnings, receipts, or output do not exceed P50,000 shall keep and use a simplified set of bookkeeping records. Also, businesses whose gross quarterly sales, earnings, receipts, or output exceed P150,000 shall have their books of account audited and examined yearly by independent Certified Public Accountants (CPAs) and their income tax returns accompanied with a duly accomplished Account Information Form.

A consultant will also be required to apply for Authority to Print official receipts (OR) with the BIR before such ORs can be printed and issued to the clients. A sample OR needs to be submitted to the BIR for assessment and approval.

In case the consultant wishes to continue membership with the social security agencies, such as Social Security System (SSS), Philippine Health Insurance Corp. (PhilHealth) and Pag-IBIG, a registration update has to be filed with the respective agencies to convert a registration to self-employed status. Note that membership with these agencies is only voluntary for independent consultants, unless they operate a business and employ workers; in which case, the independent consultants must register as employers and enroll/remit their employee’s monthly contributions.

For independent consultants who are considered to be engaged in business — not as an employee but in their individual capacities — a Mayor’s Business Permit (or duly received Application for Mayor’s Business Permit) must be submitted to the BIR upon registration. However, exemption is given to those professionals practicing their profession, e.g., doctors, CPAs, and other professionals licensed by the Philippine Regulatory Commission (PRC).

A Mayor’s Business Permit may be secured from the Office of the City or Municipal Mayor where the business address or place of residence of the taxpayer is situated.

Once registered and necessary documents permits and licenses have been secured, the following basic relevant taxes shall apply:

An independent individual consultant is subject to income tax based on the graduated tax rates of 5% to 32% on net taxable income, i.e., gross receipts minus allowable expenses (and possibly an 8% gross income tax based on the proposed Tax Reform on Acceleration and Inclusion ACT [TRAIN]). However, for purposes of withholding tax, tax may be withheld by clients or customers at 15% (or 10% if gross income for the year is P720,000 or less).

The amount withheld shall be considered creditable withholding tax and will be deducted from actual income tax due when computing for the quarterly and annual income tax liabilities.

For self-employed individuals, with both compensation and business income (derived as a sole proprietor), the same tax rate applies. However, if the business is incorporated, the income will be subject to a 30% corporate income tax rate.

Aside from the foregoing taxes, an independent contractor is likewise subject to either percentage tax or Value Added Tax (VAT), as follows:

• Percentage tax — An independent consultant shall be required to pay the percentage tax of 3% if his gross receipts for the year do not exceed P1,919,500.

• VAT — An independent consultant shall be subject to 12% VAT if his gross receipts exceed P1,919,500. The independent contractor may generally pass the VAT to his local clients.

Percentage tax and VAT due should be reported and remitted to the BIR through the filing of monthly and quarterly tax returns.

Professionals licensed by the PRC are required to pay their annual professional tax to the local government unit (LGU) pursuant to Section 139 of the Local Government Code.

Moreover, independent consultants are required to pay local taxes and business permit fees to the LGU in the city or municipality where the business or residential address is situated. Depending on the nature of work rendered, the LGU may further assess local fees, such as sanitary or City Health inspection fee, fire safety inspection fee, etc.

The foregoing are just some of the basic tax compliance requirements for independent consultants; there are others, e.g., documentary stamp tax and withholding tax on compensation (for employees).

Admittedly, complying with government paperwork and registration process can be challenging. However, while the need for income is normally given more weight, compliance with the rules and regulations should also be given priority. With the continuous effort of the government to provide assistance and its future plans to ease business registration processes, there is reason to hope for compliance with regulatory requirements to become more efficient. Indeed, both interests must meet in the middle somewhere. Only by maintaining this equilibrium we can be assured of better compliance, and a more sound business environment.

The views or opinion expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co.  The content is for general information purposes only, and should not be used as a substitute for specific advice.

Kent Lileo Tong is a senior manager at the tax services department of Isla Lipana & Co., the Philippine member firm of the PwC network.

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