#AskTheTaxWhiz: Planning to franchise a food cart business?
Like what you said, I started receiving higher take-home pay under the new Tax Reform for Acceleration and Inclusion (TRAIN) law. Instead of spending and buying a car, I went to the Franchise Asia Expo and decided to franchise a food cart business. What are the taxes I need to pay as a franchisee?
Franchises are subject to the usual income and business taxes plus 20% final withholding tax on royalty fees due to your franchisor. If annual gross revenues will exceed P3 million (the new value-added tax or VAT threshold under the TRAIN law), you will be subject to 12% VAT. Otherwise, you have to pay 3% percentage tax in lieu of VAT.
If you register as a corporation, your income will be subject to 30% corporate income tax. If you register as a sole proprietor, it will be subject to personal income tax of up to 35%.
Moreover, if you decide to franchise a service business or register as a professional, you may opt to avail of the optional 8% based on your gross sales not exceeding P3 million. This will be in lieu of both personal income and percentage taxes payable quarterly.
I am a member of the Association of Filipino Franchisers Incorporated, and as a franchisor, the royalties I receive are subject to a 20% final tax. Is it possible to avoid this specific tax?
Yes. The 20% final tax on royalties is mentioned under Section 24 (B) of the National Internal Revenue Code – it's Rate of Tax on Certain Passive Income.
In the case GR No. 160756, the Supreme Court upheld Bureau of Internal Revenue (BIR) Ruling DA-501-04 which states that "if the income is generated in the active pursuit and performance of the corporation's primary purpose, the same is not passive income."
In other words, if the royalties are not considered passive income, they will only be subject to the regular corporate income tax, and not the 20% final tax.
To do this, you have the option of opening another corporation with the primary purpose of franchising your business, thereby making the franchise royalties part of your active income.
The 30% corporate income tax may seem higher than the 20% final tax, but remember that the final tax is based on gross revenue instead of the taxable income. Furthermore, the regular corporate income tax is also open to either itemized deductions or the optional standard deductions.
But it's not as simple as it appears. You need to do tax planning as part of your strategic management, whether to incorporate a separate company or not, and how to manage your taxes as you expand your business.
You may attend our Executive Tax Briefing (ETB) for CEOs and Business Owners. We also conduct Exclusive Tax Coaching (ETC) for Startups and Small Businesses. For details and scheduling, email us at email@example.com or call (02) 6227720.
Mon Abrea, popularly known as the Philippine Tax Whiz, is one of the 2017 Outstanding Persons of the World, a Move Awards 2016 Digital Mover, one of the 2015 The Outstanding Young Men of the Philippines (TOYM), an Asia CEO Young Leader of the Year, and founding president of the Asian Consulting Group (ACG) as well as the Center for Strategic Reforms of the Philippines (CSR Philippines). You may email him at firstname.lastname@example.org or visit www.acg.ph for tax-related concerns.