Tax Planning
Tax Planning
This domain tests lawful tax efficiency across income, investments, business, and transfers under the NIRC as amended by the TRAIN Law (RA 10963). Expect questions on graduated income tax, the 8% option, VAT and percentage tax, final taxes, and timing of deductions.
Core rules
- Graduated income tax runs from 0% to 35%; the 8% flat option is available to self-employed individuals and professionals with gross sales or receipts not exceeding ₱3 million, in lieu of graduated income tax and percentage tax.
- VAT is generally 12%; non-VAT registered businesses may pay percentage tax.
- Final taxes apply to certain passive income, such as peso deposit interest and dividends.
- Tax avoidance uses legal elections and timing; tax evasion is illegal.
- Keep separate business and personal records and substantiate deductions.
Worked example
A freelancer has gross receipts of ₱2.4 million and itemized expenses of ₱600,000. Under the 8% option, tax = 8% × (₱2.4 million − ₱250,000) = ₱172,000. Under graduated rates with itemized deductions, taxable income = ₱1.8 million; tax is approximately ₱352,500. The 8% option is cheaper here, but the client must qualify and register correctly. Reasoning: compare options on after-tax cash flow, not just the headline rate.
Traps
- Using the 8% option while exceeding the ₱3 million threshold.
- Mixing personal and business expenses.
- Missing quarterly and annual filing deadlines.
- Ignoring local taxes, documentary stamp tax, and withholding obligations.
- Confusing tax avoidance with evasion.