Form of the Future

The year 2018 was a tough for tax legislators and practitioners. Along with the changes brought about by TRAIN, the annual tax forms for individual taxpayers were also expected to be revised. Just in time for the filing of the 2018 annual individual tax returns, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) no. 19-2019 which circularizes the availability of various revised BIR forms, one of which is the Annual Income Tax Return for Individuals Earning Purely Compensation Income – the BIR form no. 1700.

To back track, the BIR form no. 1700 had the following versions: October 2001, July 2008, November 2011, and June 2013. The January 2018 version is a two-page form similar to the July 2008 version. The supplemental information page of the old form, which was first introduced in the November 2011 version, is now removed in accordance with RMC no. 24-2018 which provides that the supplemental information is no longer required to be declared. The other information page of the old form was also removed since the exemption for qualified dependents is no longer allowed under TRAIN.

When you look at the new version of the BIR form no. 1700, you will notice the following new features: taxpayer type; reference to the Data Privacy Act; tax debit memo as a mode of payment; and claiming for foreign tax credits with citizenship and foreign tax number.

Taxpayer Type

The new form introduced taxpayer type where the taxpayer can choose if they are an employee or a non-resident alien not engaged in trade or business (NRANETB). Employees are generally subject to the graduated tax rates (zero percent-35 percent) except those considered as NRANETBs who are subject to a flat rate of 25 percent. In the old tax form, the calculation under the eBIRForms system automatically computes the tax due using the graduated rates. Thus, NRANETB taxpayers had to manually fill out the form in order to put the correct amount of tax due which should be computed at 25 percent if they wish to file an annual tax return. The BIR resolves this issue by putting the taxpayer type boxes in the new version of BIR form no. 1700. Though this version is not yet available under the eBIRForms system, it is expected that the tax rate that will apply is based on the selected taxpayer type.

Data Privacy Act

In the new BIR form no. 1700, the taxpayer’s signature on the tax form not only affirms the taxpayer’s oath that the tax return, together with the attachments, have been made in good faith and are true and correct, but also confirms the taxpayer’s approval to process their information as contemplated under the Data Privacy Act of 2012 for legitimate and lawful purposes.

Sustained compliance with the Data Privacy Act is included in the BIR’s priority programs in 2019. Though there may be additional administrative processes, on the brighter side, we have to be glad that the BIR’s interest is aligned with ours as they exercise due diligence in handling our personal information.

Tax Debit Memo

The BIR also added a mode of payment in the BIR form no. 1700 – through a tax debit memo. This is not a new mode of payment for individual taxpayers. The tax debit memo option was introduced in the June 2008 version of the BIR form no. 1700 but removed in the June 2013 version.

In simpler terms, the new tax form has a feature which allows taxpayers to use previous tax overpayments to settle his/her current tax liability with the BIR. This is not common for individual taxpayers since most are employees whose taxes have been withheld by their employers. Having a tax debit memo option on the mode of payment now, one can say that the BIR welcomes the idea of accepting tax refund claims for individual taxpayers in future.

Foreign tax credits

The most noteworthy of the new features is the foreign tax credit (FTC) claim. An FTC is a mechanism to mitigate the effects of double taxation. It allows a taxpayer to claim the taxes paid abroad as a credit against the taxes due in the Philippines on the same income that was already subjected to tax abroad, subject to limitations set by the BIR. Only resident Filipino citizens are entitled to claim an FTC since it is the only taxpayer classification that is subject to tax on worldwide income.

Why does the BIR require this information now?

Over the years, globalization opened opportunities for employees to work abroad either on a temporary or permanent basis. With the help of technology, employees can now work remotely and report directly to their head offices even being halfway across the globe. Globally mobile employees are increasing and this creates challenges for tax authorities to monitor whether these employees are properly declaring their income and paying the correct amount of taxes. We can speculate that information such as an FTC claim on the tax return may be used in filtering taxpayers in the future and can potentially be used for data analytics which will be useful in identifying noncompliant taxpayers.

Different countries enter into international conventions and agreements on tax matters to allow exchange of information between two jurisdictions in order to ensure proper application of their tax laws without being restrained by their national borders. This is in response to offshore tax evasion which is a serious problem for countries all over the world. In the Philippines, the BIR issued the Exchange of Information Regulation in 2010 to provide the necessary guidelines. This regulation was amended twice in 2018.

The BIR’s priority program in 2019 includes intensifying the investigation of taxpayer compliance, and collect the right taxes through the utilization of computer assisted audit tools and techniques (CAATS) and implementation of data sharing agreements with other government agencies (e.g. Bureau of Immigration) to obtain data of registered taxpayers for internal revenue purposes. These priority programs mirror the BIR’s efforts in expanding its reach in order to generate more revenues for government projects.

The BIR may have designed the new tax form to include information that are relevant for them in monitoring tax compliance as well as in identifying tax audit targets. This design looks ready for future tax developments and digital transformation.

With the recent trend in the Philippine tax laws, one can say that the BIR is looking at things from a more advanced perspective. Our tax laws are not as rigid as that of bigger countries, but looking at how the BIR introduces new concepts and requirements, we can say that our tax laws are evolving. The BIR is trying to find solutions to complex transactions and cross-border challenges. The tax reform has already started and we do not expect the BIR to stop on the packages introduced under the CTRP. It may just be a beginning of a new era in Philippine taxation.

With the current mindset of our tax authority, changes on the tax laws and regulations should not be ignored. Business decision-makers must keep their finger on the pulse in order to remain compliant and stay ahead of the taxation game.