I.

INTRODUCTION

The Philippines has different income tax rates for individuals,

corporations, and partnerships. Knowing the right income tax return that an
individual will pay can make his life better. A taxpayer must pay his/her
taxes properly because it is required that taxes should be paid so that the
government have a budget or fund to make the projects that can help the
people in this country. The failure to pay one’s tax is punishable by law.
Income tax is one of many taxes that should be paid by a taxpayer.

According to the bir.gov.ph, “Income Tax is a tax on a person's

income, emoluments, profits arising from property, practice of profession,
conduct of trade or business or on the pertinent items of gross income
specified in the Tax Code of 1997 (Tax Code), as amended, less the
deductions and/or personal and additional exemptions, if any, authorized
for such types of income, by the Tax Code, as amended, or other special
laws”.

Because the new administration promised that they will implement a

fairer tax reform program, President Duterte has already signed the
Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion
(TRAIN) bill aiming to earn revenues to fund the country’s infrastructure
program. In his speech, the President remarked that the passage of the
TRAIN is the administration’s biggest Christmas gift to the Filipino people.
The lower income tax rates were supposed to provide Filipinos with higher
disposable incomes, which, in turn, could boost domestic consumption.
The TRAIN will also generate revenues to finance much-needed
social and physical investments — the necessary foundations for
sustaining rapid economic growth. Citing these developments, several
multilateral institutions and ratings agencies upgraded their economic
forecasts for the country. The new TRAIN law revises most of the Tax
reform act of 997.
As a complimentary measure TRAIN, Congress introduced Package
1B or the Tax Amnesty Bill. Package 1B includes the lifting of bank secrecy
laws and automatic exchange of information and three types of amnesties
(on estate tax, all unpaid internal revenue taxes with the corresponding
waiver of bank secrecy laws in the availment thereof, and delinquencies).
There are also proposals on other amnesty taxes such as importation taxes
and customs duties.
 The TRAIN law will reduce the personal income tax rates of each
individual, while people earning a lower personal income will be free from
tax.

The new TRAIN law will foregone the tax rates from those who have
an annual income, not over P250, 000. While people earning more than
P250, 000 but not over P400, 000 annually will be charged with 20 percent
tax on the excess over P250, 000.

Annual income over P400, 000 but not more than P800, 000 will pay
worth P30, 000 and will be charged about 25 percent of the excess over
P400, 000.

People earning more than P800, 000 but not over P2 million per year
will be charged with P130, 000 plus 30 percent of the excess over P800,
000.

Individuals with over P2 million annual income will pay P490, 000
plus 32 percent of the excess over P2 million.

The yearly income of over P8 million will have a tax of P2, 410, 000
plus 35 percent of the excess over P8 million.
 II. BODY

The first of 5 tax reform packages, the Train law "corrects a

longstanding inequity of the tax system" by reducing the income taxes of
99% of income taxpayers, said Malacañang. With the Train law now
signed, almost all the 7.5 million income taxpayers in the country should
see a reduction in their income tax rates starting next year, according to a
media briefer from the Senate committee on ways and means on the
bicameral committee-approved Train bill.

Income taxpayers with an annual salary of P250,000,or those earning

approximately P22,000 monthly and below, are now exempt from income
tax payment. The law also exempts from tax payment the first P90,000 of
the 13th month pay and other bonuses.

Self-employed professionals will see new income tax rates with the
introduction of an 8% flat tax on gross sales or receipts instead of income
tax and percentage tax to be filed once a year. Some people already know
this, but many are still unaware: under the tax reform, the personal
exemption of P50,000 and additional exemption of P25,000 per
dependent, which were enjoyed by taxpayers in the old tax system, have
now been removed.

In the past, an individual may avail of personal exemption (P50,000)

and additional exemption (maximum of P100,000 if there are four
dependents) to be deducted from the taxable income. Under TRAIN, the
exemption has been simplified and made more straightforward. This simply
means:

 if the taxpayer’s gross income is P250,000 or below, he or she is

automatically exempted from paying the income tax; and
 it doesn’t matter now if the taxpayer has one dependent or four
dependents or no dependent at all
 That means two taxpayers with the same gross income will pay exactly
the same tax due — regardless if one taxpayer has four children (i.e., four
dependents) while the other has none. In addition to the removal of
personal and additional exemptions, the maximum P2,400 premium for
health and hospitalization insurance, which is previously deductible from
taxable income, has also been removed. To make up for the loss of
revenue due to reduced income tax, the law imposes higher taxes on cars,
fuel, tobacco, cosmetic surgery, tobacco, and some sweetened beverages.

Diesel, which is not taxed at present, will be imposed P2.50-per-liter

tax in 2018, P4.50 in 2019, and P6 in 2020. LPG would have be taxed P1
per liter in 2018, P2 in 2019, and P3 in 2020. For gasoline, from the current
tax of P4.35 per liter, it would be imposed a levy of P7 per liter in 2018, P9
in 2019, and P10 in 2020.
The law also applies a 4-tier tax scheme for automobiles:

 4% for up to P600,000
 10% for over P600,000 to P1 million
 20% for over P1 million up to P4 million
 50% for over P4 million

The fuel taxes will have an effect that will cut across income classes.
And for the poor, this would even be costlier, since their pre-TRAIN levels
of earnings, if any, are not taxed anyway, and hence any change in the tax
rates would not have an effect in their disposable incomes. Thus, any
increase in prices of transportation fares and commodities will certainly hit
the poorer classes of society harder.

Finance Secretary Carlos Dominguez III had said the hike in prices of
automobiles would mainly impact the well-off individuals who could afford
to buy luxury cars.All pick-up trucks and electric vehicles would be
exempted from additional taxes. Hybrid cars would be imposed half the
taxes as non-hybrid vehicles.

The law also imposed a tax of P6 per liter for drinks using sugar and
artificial sweeters and P12 per liter for using high fructose corn syrup. Milk
and instant coffee, drinks consumed by a majority of Filipinos, are
exempted. Tobacco products will also be more expensive as under the
Train law, the sin tax on such products will be increased. Coal will be taxed
P50 for 2018, P100 for 2019, and P150 for 2020.

The Train law imposes a 5% levy on cosmetic surgery purely for

aesthetic purposes. Mining will be taxed double, from 2% excise tax to 4%
excise tax on metallic minerals like copper, gold, and chromite. To cushion
the impact of these higher taxes on the poorest Filipinos, the law provides a
cash transfer mechanism.

Under the law, 10 million of the poorest households will receive cash
transfer of P200 per month in 2018, and P300 per month in 2019 and 2020.
There will be also an increase in the value added tax (VAT) threshold from
P1.9 million to P3 million. This would mean small business with annual
sales of P3 million and below would be exempt from paying VAT, which is
envisioned to encourage growth and job generation. A flat rate of 6% for
estate tax and donor’s tax will also be imposed under the new law. Under
the previous scheme, estate worth P200,000 and above was taxed
between 5% to 20%.

This is precisely why there is a subsidy component to the TRAIN

Law, which is going to be implemented by the Department of Social
Welfare and Development (DSWD) through the unconditional cash transfer
(UCT) program. It is estimated that about 10 million Filipino households
and individuals who belong to the poorest sector of the country will benefit
from this program.

Family homes that are worth up to P10 million, will be exempted from
estate tax, higher than the P1-million tax-exempt value under the current
law. To help heirs settle expenses relating to the passing of the deceased
person, the Train law also increased allowable withdrawals from the
deceased person’s account to any amount, subject to a 6% final
withholding tax. Currently, only withdrawals up to P20,000 is allowed.

New rates for the documentary stamp tax and final tax on currency
deposit units are provided in the Train law. Tax rates for stocks not traded
in the stock exchange as well as the stock transaction tax are increased
under the law. The tax rate on sale of stocks have been increased.
The sale of stocks not traded in the Philippine Stock Exchange (PSE) is
previously taxed 5-10%. This is now increased to 15% under the tax
reform. Meanwhile, sale of stocks that are traded in the PSE will be
taxed 0.6% of the gross trade amount, up from the previous rate of 0.5%.

Under the existing National Internal Revenue Code (NIRC), lotto

winnings and all PCSO prizes are tax-exempt. This has now been changed
by the TRAIN law. Starting this 2018, all PCSO and lotto prizes are taxed
20% if the amount of the prize or winnings is above ten thousand pesos
(P10,000).

Long-term time deposits (TD), or time deposits with duration of 5 years

and 1 day, will continue to be tax-exempt. However, the tax on interest
income of these deposits once preterminated has been changed. And from
the current rate of 5-20%, the tax charged on the interest income of long-
term time deposits that are preterminated (meaning, withdrawn prior to the
scheduled maturity date) has been increased to a fixed 20%.

Under the existing tax code, the interest income on foreign currency
accounts (e.g., US dollar, Euro, Japanese Yen, Korean won, etc.)
deposited in Philippine banks is 7.5%. The TRAIN law has increased
the foreign currency deposit unit (FCDU)’s interest income tax rate to 15%.

Socioeconomic Planning Secretary Ernesto Pernia said the

implementation of the first package of the Tax Reform for Acceleration and
Inclusion (TRAIN) law “has been very beneficial” for the country. The law
has improved fiscal space for the government to fund the “Build, Build,
Build” program and various social programs, including the conditional cash
transfer (CCT), unconditional cash transfer (UCT), free tuition in state
universities and colleges (SUCs), free irrigation for farmers, and ‘Pantawid
Pasada’ cash grants.

At the end of the month, the DSWD is scheduled to begin handing out
a lumpsum of P2,400 to the qualified beneficiaries. For 2018, a total of P24
billion has been earmarked for the implementation of the UCT in the 2018
General Appropriations Act. The funds are now deposited with the Land
Bank of the Philippines.
 The first to receive the cash grant are the 1.8 million household
beneficiaries of the Pantawid Pamilyang Pilipino Program (4Ps) with cash
cards who will receive these by tomorrow, January 31. The remaining 2.6
million 4Ps beneficiaries without cash cards will receive theirs at a later.

Also included in the UCT are the three million indigent senior citizens
who are currently also beneficiaries of the DSWD Social Pension Program
which is implemented in partnership with their respective local government
units (LGUs). They will receive their cash grants by the end of March 2018.
The remaining 2.6 million households is chosen from the DSWD
Listahanan, or National Household Targeting System for Poverty Reduction
(NHTS-PR). A validation process is conducted and expected to last for
three months. DSWD plans to finished the process on May so the cash
grants is already distributed to the qualified households last June.

Unlike the 4Ps, which is a conditional cash transfer where the

disbursement of the cash grant is contingent on some conditions, such as
enrolling children in school, the UCT is an outright subsidy given by the
State to the poor to shelter them from the shock of increasing prices
despite unchanging low levels of income which is expected as an effect of
TRAIN.

Outright subsidies are always a double-edged sword. They provide a

stopgap measure for families which are adversely affected, hoping that the
cash grants will compensate for the increases in household expenditures
due to rising prices of commodities.

However, the strategy of giving a lumpsum of P2,400 to a household,

without the rudimentary consciousness to save, could lead to the possibility
that the amount may end up being quickly spent, and hence its effects
would not be felt to be spread out over the entire year. Another concern is
whether the amount is enough to cover the increases in the prices of
goods. The subsidy appears to be also insensitive to household size, which
is in fact a primary factor in determining whether the amount would be
sufficient.
 Some lawmakers have reiterated their call for the suspension of the
TRAIN law amid increasing inflation rate, while others suggested
postponing the collection of additional excise tax under the law.

The country’s inflation rate rose to 5.2 percent in June 2018 due to
faster price increases in major commodities like food, fuel and transport.
Such increases were caused by various factors, including global oil prices,
peso depreciation and rice prices. Despite of that the TRAIN law increased
the take-home pay of 99 percent of income taxpayers. That should help in
coping with the rising prices of goods.

All in all, when you combine TRAIN’s impacts on personal income

taxes, excise taxes, VAT, and inflation, the poor come out as worse-off.
Government knew this at the outset. That is why TRAIN allocates at most
30% of its revenues to palliative measures that can help tide over specific
sectors that TRAIN will hurt. These include:

 Unconditional cash transfers for 10 million poor households

 Fuel vouchers for jeepney franchise holders
 Subsidies for workers in the sugar industry (likely due to the excise
tax on sugar-sweetened beverages)
 Discounts on PUVs, NFA rice, and TESDA training for minimum
wage earners, the unemployed, and the poorest half of the
population

Government expects that these transfers will more than offset the
impact of higher inflation on the poor. And yet such aid – especially the
unconditional cash transfers – will be insufficient and delayed. Why? First,
the transfers will likely be insufficient because they are fixed by law – P200
per month per poor family in 2018, and P300 per month in 2019 and 2020.

This means, for example, that all poor families will get the same
amount regardless of the number of their children. Official estimates of
TRAIN’s impacts were calculated assuming a family of 5 (that is, 3
children). But Dean Dennis Mapa of the UP School of Statistics
correctly pointed out that the very poor tend to have more children than
that. He also pointed out that the poorest 30% of households might
experience higher inflation rates than the rest of the country owing to the
larger share of their budgets going to food (now affected by TRAIN’s new
excise taxes).

However, one should also bear in mind that aside from the
employment benefits that may result from the infrastructure rush, which
could not even accommodate all 10 million households, there is no
assurance that the aggregate growth of the economy resulting from
infrastructure development will indeed trickle down to the poor.

Direct subsidies can at best provide quick palliatives. The long-term

solution is to invest not only in physical infrastructures, but also in social
infrastructures that could transform the poor from passive recipients of cash
grants, into becoming active and viable economic actors.

At the core of the debates on the TRAIN is its impact on ordinary

Filipinos, especially those who are earning below minimum wage—the
same segment exempted from income taxes but who will have to bear the
brunt of higher commodity prices. Thus, while targeted earmarks are a
positive step toward boosting social investments, the government still
needs to iron out kinks in its program implementation. With no mitigating
measure in place, poor households will undoubtedly lose out on the tax
reform.

To the government’s credit, it has been aggressively pursuing efforts

to make the economic environment more attractive for investors. The
Department of Finance recently submitted its proposal for Package 2 of its
tax reform program to Congress. The second package aims to reduce
corporate income tax rates and rationalize fiscal incentives.

In crafting future packages, however, the administration should

refrain from levying new taxes that will further burden ordinary Filipinos.
Instead, measures that would make the tax system more efficient, simplify
compliance among taxpayers, and plug leakages and loopholes in the
system should be prioritized.
 The challenge is for revenue collection agencies to meet their
collection targets and for implementing agencies to spend incremental
revenues efficiently. Rolling out key projects within the timelines will also be
a given challenge. As I have pointed out in earlier commentaries, imposing
new taxes without the commensurate tangible reforms in efficient and
transparent administration will be a bitter pill for the average Filipino to
swallow.