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The tax relief Republic Act No. 9504
is about to affect how you compute your payroll
Posted on 27 June 2008
By now
lots of people have had their little shiver of pleasurable anticipation
upon learning that a new tax relief law has been signed. Republic Act
9504 was signed by President Gloria M. Arroyo last Tuesday, 2008 June
17. This new law amends RA 8424 - the National Internal Revenue
Code of 1997. The actual wording of the law
has yet to be published in a national newspaper (Our source at the BIR confirms that as of June 25,
the law has not yet been published), but this is what we
know so far from newspaper articles:
A. Minimum wage earners are now exempt from paying income tax.
B. Aside from their basic pay, minimum wage earners' overtime, holiday, night differential and hazard pay are also exempt from Income Tax.
C. There shall be new, higher exemptions (personal and per qualified child) for all minimum wage and greater-than-minimum-wage earners alike.
A. Minimum wage earners are now exempt from paying income tax.
B. Aside from their basic pay, minimum wage earners' overtime, holiday, night differential and hazard pay are also exempt from Income Tax.
C. There shall be new, higher exemptions (personal and per qualified child) for all minimum wage and greater-than-minimum-wage earners alike.
(Click here to read the news release from Inquirer.net and here to visit the DLSU-FEU tax site. On 30 June 2008, the BIR announced a public hearing on implementing rules for RA 9504 at its website)
What are the im
plications for users of any kind of payroll software?
Let's
get the obvious question out of the way: For users of computerized
payroll solutions, can the changes introduced by RA9504 be handled by a
simple editing of the withholding tax tables? In a word, no. To put it
plainly, RA9504 requires both an algorithm change in the payroll
application software and a revision of the withholding tables. (Even
people who process their payroll purely manually will find that RA9504
requires both a change in their computational protocols, and a revision
of the withholding tables.)
Why is the algorithm change
unavoidable? Typical existing payroll software for the Philippine
market, regardless of author, already allows you to flag an employee to
be exempt from withholding tax; but that's inadequate to address the
new conditions created by RA9504. Why so? If you tag an employee as
exempt from withholding tax in your current payroll software, it's true
that he will have zero withholdings from payday to payday as the year
unfolds. But come annualization time, either at the end of the year
or at the time he resigns, this employee will suddenly see his entire
year-to-date tax bill coming due all at once. This is because
being exempt from withholding tax is not the same thing as being exempt
from income tax. For minimum wage earners, it is the latter that is
intended by RA9504. Therefore, the typical payroll software for the
Philippine market will need to undergo a modification to its algorithms
to enable this intention. (Click here to learn more about algorithms.)
But modifying the basic algorithms is not enough (though it is indeed the main bulk of the work to be done); the BIR – and thus Philippine payroll software authors - will also have to modify existing withholding tax deduction tables. Amending the deduction tables is necessary not only because of the new exemption of minimum wage earners from income tax, but also in order to address the other main element of RA9504, which is to increase personal and dependent-child exemptions for the rest of the taxpaying public, including higher-than-minimum-wage earners. The BIR will want to define clearly what the relevant income ranges are, and their corresponding (amended) exemptions. The BIR will doubtless also define what the minimum wage level is, and will accordingly exempt those from withholding tax as well. (This last is not strictly necessary from a software programming standpoint, because once defined as tax-exempt, a worker will by definition be no longer subject to withholding.)
All of this means that in addition to the algorithm modification outlined two paragraphs earlier, you should also expect a new withholding table from your software supplier. Your software vendor should provide you with this new table in electronic form soon after the BIR publishes it (BIR has not yet done so at this writing).
But modifying the basic algorithms is not enough (though it is indeed the main bulk of the work to be done); the BIR – and thus Philippine payroll software authors - will also have to modify existing withholding tax deduction tables. Amending the deduction tables is necessary not only because of the new exemption of minimum wage earners from income tax, but also in order to address the other main element of RA9504, which is to increase personal and dependent-child exemptions for the rest of the taxpaying public, including higher-than-minimum-wage earners. The BIR will want to define clearly what the relevant income ranges are, and their corresponding (amended) exemptions. The BIR will doubtless also define what the minimum wage level is, and will accordingly exempt those from withholding tax as well. (This last is not strictly necessary from a software programming standpoint, because once defined as tax-exempt, a worker will by definition be no longer subject to withholding.)
All of this means that in addition to the algorithm modification outlined two paragraphs earlier, you should also expect a new withholding table from your software supplier. Your software vendor should provide you with this new table in electronic form soon after the BIR publishes it (BIR has not yet done so at this writing).
Some questions
immediately
come to mind. These will of course be put to rest once the implementing
rules are promulgated, but it helps to have your questions ready for
when the rules finally come out; then you'll know exactly what posers
to throw at your auditor and/or software supplier. These are also
questions one might want to put to the BIR during their public hearings
on implementing rules:
1. Who is a minimum wage earner? No problem if employee is a daily wage earner; there are guidelines on what is a minimum daily wage for Metro Manila and outside Metro Manila. But for a salaried worker, what is the gross monthly compensation to be considered a minimum wage earner? This remains to be defined by the BIR.
However that crucial threshold ends up being defined (and remember, it in fact still remains to be defined as of this writing), the rub is going to be during that bittersweet transition point when an employee crosses the threshold from “minimum wage earner” to “greater-than-minimum-wage earner.” This scenario comes to mind: Say a minimum wage earner has substantial OT, ND, holiday, and hazard pay for the first 10 months of the year, all of which are tax exempt per RA9504. Tax exempt ... so far. Now, say on month 11 he gets a raise in his base pay, pushing him out of the minimum wage earner category. Unless RA9504 can be interpreted to continue to provide tax exemption to his income earned while he was officially a minimum wage earner (in effect his taxable income is only that which he earned when he got out of the minimum wage earner category), then Mr ex-minimum wage earner will suffer a huge tax bite during annualization time. (Click here if you are a SURE! PayMaster user.)
If the BIR takes a conservative view on this question, then employers should beware this potential trap. To spare yourself the yelps of distress from affected workers, you should be constantly careful that any pay increase that kicks an employee up and out of minimum wage earner status (a) is implemented shortly after December 31 rather than shortly before; and if giving the raise before December 31 is unavoidable, (b) that it better be of a sufficient magnitude that the retroactive tax bite does not paradoxically result in a smaller net take home pay for the year. Yes, life is hard.
1. Who is a minimum wage earner? No problem if employee is a daily wage earner; there are guidelines on what is a minimum daily wage for Metro Manila and outside Metro Manila. But for a salaried worker, what is the gross monthly compensation to be considered a minimum wage earner? This remains to be defined by the BIR.
However that crucial threshold ends up being defined (and remember, it in fact still remains to be defined as of this writing), the rub is going to be during that bittersweet transition point when an employee crosses the threshold from “minimum wage earner” to “greater-than-minimum-wage earner.” This scenario comes to mind: Say a minimum wage earner has substantial OT, ND, holiday, and hazard pay for the first 10 months of the year, all of which are tax exempt per RA9504. Tax exempt ... so far. Now, say on month 11 he gets a raise in his base pay, pushing him out of the minimum wage earner category. Unless RA9504 can be interpreted to continue to provide tax exemption to his income earned while he was officially a minimum wage earner (in effect his taxable income is only that which he earned when he got out of the minimum wage earner category), then Mr ex-minimum wage earner will suffer a huge tax bite during annualization time. (Click here if you are a SURE! PayMaster user.)
If the BIR takes a conservative view on this question, then employers should beware this potential trap. To spare yourself the yelps of distress from affected workers, you should be constantly careful that any pay increase that kicks an employee up and out of minimum wage earner status (a) is implemented shortly after December 31 rather than shortly before; and if giving the raise before December 31 is unavoidable, (b) that it better be of a sufficient magnitude that the retroactive tax bite does not paradoxically result in a smaller net take home pay for the year. Yes, life is hard.
2. Is the
exclusion of OT, ND, hazard, and holiday pay from taxable income only
for those qualified as minimum wage earners? Or does it hold for all
employees, regardless of their base salary? Early indications from
newspaper reports and this blogger seem to signal that only minimum wage earners will enjoy this break;
but a clearer pronouncement from authorities would be appreciated by
the taxpaying public. (Click here if you are a SURE! PayMaster
user.)
3. RA 9504 takes effect 15 days from publication
in a national newspaper. As this is written, the entire wording of the
law has not yet seen official publication; only press releases and
feature articles about it have been published. Therefore, strictly
speaking, the 15-day countdown has not yet begun as of this writing. Let's say for discussion's sake that
the law is published in its entirety on June 30, 2008; then the
earliest pay period it will be implemented would be the July 16 – 31
pay period, and its effect on real people first seen on the payslips of
July 31 (or thereabouts if your company observes different paydays).
But there's bigger fish to fry here: what about retroactivity? What happens to the already withheld – and remitted - tax (from January 1 to July 15 in our example) of an employee who henceforth will now be income tax exempt because he qualifies as a minimum wage earner? Will this be returned to him/her? Any payroll software author would need to know the answer to this question, because this affects the algorithm for the tax annualization computation. (Indeed, the payroll clerk in a non-computerized payroll system would also need to know this, because this changes his computation method; ie, algorithm.) And, assuming the amount is to be returned to the taxpayer, how does the employer get back the withheld tax that had already been remitted to the BIR? That last one is a practical challenge for the employer (and good luck to you), though not a concern from a programming standpoint. (Click here if you are a SURE! PayMaster user.)
But there's bigger fish to fry here: what about retroactivity? What happens to the already withheld – and remitted - tax (from January 1 to July 15 in our example) of an employee who henceforth will now be income tax exempt because he qualifies as a minimum wage earner? Will this be returned to him/her? Any payroll software author would need to know the answer to this question, because this affects the algorithm for the tax annualization computation. (Indeed, the payroll clerk in a non-computerized payroll system would also need to know this, because this changes his computation method; ie, algorithm.) And, assuming the amount is to be returned to the taxpayer, how does the employer get back the withheld tax that had already been remitted to the BIR? That last one is a practical challenge for the employer (and good luck to you), though not a concern from a programming standpoint. (Click here if you are a SURE! PayMaster user.)
Questions? Reactions? Write to balmori@balmorisoftware.com.