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INTRODUCTION
TRAIN Law I
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.
TRAIN Law II
At the same time, the Trabaho bill intends to broaden the tax base (income
subject to tax) by removing some of the preferential or lower corporate tax
rates under the Tax Code and setting stricter rules on transactions between
related parties (affiliated/sister companies).
Another part of the Trabaho bill that will significantly broaden the tax
base is the rationalization of tax incentives by making them performance-
based, targeted, time-bound, and transparent.
TRAIN Law I
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.
● 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.
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%.
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 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%.
At the end of the month, the DSWD is scheduled to begin handing out
a lump sum 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.
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.
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.
The tax reform package is lazy work, opposition lawmaker Rep. Miro
Quimbo (Marikina City, 2nd District) said. The lawmaker said the Finance
Department was penalizing taxpayers through higher fuel prices, but not
doing enough to go after tax evaders. “What people don't realize is that
TRAIN 1 and TRAIN 2 — pardon my word — (is) lazy work. Our problem is
our tax effort, our ability to collect.” He said.
But Mapa said the basis of the computation for the cash aid is
underestimated, since it is based on the assumption that the family size is
five. He said the fertility rate of the poorest 20 percent is five, so the
average poor family's size is seven.
Aquino said there have been reports that the BPO sector may need
to slash their workforce or set aside expansion plans in the Philippines due
to the tax reform program. “The BPO sector is a major source of livelihood
for Filipino families. We cannot afford to give away job security and job
opportunities, especially with the rising prices of goods,” said Aquino, who
chairs the committee.
The veto could, likewise, discourage other BPOs from setting up shop
in the Philippines. On the other hand, Aquino said the Information
Technology and Business Process Association of the Philippines (IBPAP)
mentioned that they are anticipating a decline in demand for low-skilled
jobs in the IT-BPO industry of about 43,000 jobs by 2022.
But Aquino said the threat by AI can be offset if government agencies
and private companies work together to upgrade skills and abilities of
Filipino workers through training and education. He said that with the
IBPAP report, the government can “meet the anticipated increase in
demand of 388,000 jobs for mid-skilled tasks, and 309,000 jobs for high-
skilled tasks in 2022” if the existing IT-BPO workforce and if fresh college
graduates are “re-skilled and up-skilled.”
The National Internal Revenue Code provided a table of rates that the
estate of a decedent would pay if the value of the net estate met a certain
threshold. To get the value of the net estate, we would subtract the
deductions allowed by law from the gross value of the estate.
For instance, if the net taxable estate’s value was over P10 million, it
would pay the amount of P1,215,000 plus an additional rate of 20 percent
for the excess of P10 million. Thus, if the value of net estate is P11 million,
the estate shall pay P1,215,000. An additional P200,000 shall be imposed,
which is the 20 percent of the excess of P10 million. The total amount
would be P1,415,000. The Tax Reform for Acceleration and Inclusion
(TRAIN) law has simplified the computation of the net estate tax. There is
no longer a table or graduated rates. The estate tax is now fixed at 6
percent of the value of the net estate. So, using the previous example of
P11 million, the estate tax shall be P660,000.
Now, this situation could arise: What if the amount of the net estate
tax due, after deductions, was zero or less than the amount subjected to
final withholding tax? Such a situation would be possible and there may not
be a tax liability in the first place if the gross estate and deductions are
considered. The advanced deduction from the final withholding tax
prejudices the estate of the decedent when it should not. In effect, the
withdrawn amount of deposit is taxable by itself, regardless of the net
estate of the decedent.
The increase would have brought the total excise tax on gasoline
from P7 to P9 per liter, and on diesel from P2.50 to P4.50 per liter.
"After consulting the leadership of both the Senate and the House of
Representatives, as well as the economic team, the President is confident
that this course of action will help anchor inflation expectations for the
coming year, allow the public to manage their finances better, and disallow
hoarders and profiteers from taking advantage of the situation," said
Dominguez.
"Today's price and multiple estimates of crude prices over the next
two months show that the average price will stay above the $80 threshold,
and it is therefore being announced early that the suspension mechanism
will be activated," Dominguez said.
“This is a victory for the minority bloc and would help in our push for
the joint minority resolution seeking to remove the fuel excise tax under the
TRAIN law. We are optimistic that the entire Senate will support this.” said
Senate Minority Leader Franklin Drilon and his fellow opposition senators
Francis Pangilinan, Antonio Trillanes IV, Leila de Lima, and Risa
Hontiveros, in a joint statement.
Senate Majority Leader Juan Miguel Zubiri on Sunday sent to
reporters an October 9 letter from majority senators, addressed to Duterte.
They sought the President's support for the suspension of fuel excise tax
hikes for 2019 and 2020.
The World Bank previously warned that surging prices of basic goods
could slow down efforts to reduce poverty in the Philippines.
In AO No. 13, Duterte said non-tariff barriers "unduly add to the costs
of importation and limit supply, which in turn push up the prices of
agricultural commodities to the detriment of Filipino consumers, especially
the poor."
TRAIN Law II
Currently, the corporate income tax rate is 30%. Under the Trabaho
bill, the rate will gradually be reduced by 2% every two years starting 2021
until 2029, when the rate will only be 20%.
Two years after the effectivity of the proposed Trabaho law, the 10%
preferential tax on regional operating headquarters (ROHQ) will no longer
be available.
Accelerated depreciation for private educational institutions
At present, the OSD rate for individual and corporate taxpayers is the
same at 40%, but the bases are different. For individuals, the OSD is
applied on the gross sales or receipts (before deduction of cost of
sales/services). On the other hand, for corporations, OSD is applied on
gross income (after deduction of cost of sales/services).
Under the Trabaho bill, the 40% OSD rate and base will be uniform
for individual and corporate taxpayers at 40% of gross income. However,
for corporations, availment of OSD will be limited to those classified as
micro, small, and medium-sized enterprises as determined by the
Department of Trade and Industry.
To address this gap, the current Tax Code empowers the BIR
Commissioner to distribute, apportion, or allocate gross income or
deductions between or among related parties if the Commissioner finds
that such distribution, apportionment, or allocation is necessary to prevent
evasion of taxes or clearly to reflect the income of the taxpayer concerned.
Every 3 years, the BOI will formulate a SIPP for approval of the
President. In crafting the SIPP, the BOI shall consider, among others, the
following:
1. Income Tax Holiday (ITH) – The ITH shall be granted for a period
not exceeding 3 years: provided, that after the expiration of the ITH,
the other income tax incentives may be applied for a period not
exceeding 5 years, which includes the period of ITH availment.
VAT incentives
1. Two years for activities enjoying the tax incentive for more than 10
years;
2. Three years for activities enjoying the tax incentive between 5 and
10 years; and
3. Five years for activities enjoying the tax incentive below 5 years.
One of the main features of the upcoming tax reform package is the
lowering of the corporate income tax (CIT). Despite other contentious
portions of Package 2, it is generally seen as a welcome development.
In Southeast Asia, the Philippines currently has the highest CIT rate
at 30 percent. TRAIN 2 seeks to lower that, with the two main bills (HB
7214 and HB 7458) proposing different ways to lower the tax rate.
In House Bill No. 7214, the CIT will be lowered by one percentage
point for every reduction in incentive expenses amounting to 0.15
percentage point of the GDP two years prior to the passage of the bill.
Simply put, if the bill were to be passed in 2018, for every reduction in
incentive expenses equivalent to 0.15 percentage point of the 2016 GDP,
there shall be a one percentage point deduction to the CIT. Under this bill,
the CIT can only go as low as 25 percent.
Under House Bill No. 7458, the CIT will be unconditionally reduced by
one percentage point yearly. Under this bill, the CIT can go as low as 20
percent.
As a revenue-neutral proposal, this lowering of income tax will be
offset by modifications of other revenue sources, such as the removal of
certain fiscal incentives of several industries.
Several tax rates will also be increased such as the interest income of
resident foreign corporations, capital gains tax and tax on intercorporate
dividends of nonresident foreign corporations. Optional standard
deductions have been lowered from 40 percent of gross income to 20
percent. The allowable deductions for interest expense will also be lowered
proportionally to the lowering of CIT.
However, all these offsetting measures are minor ones. The main
offsetting measure, which has been heavily criticized by the Philippine
Economic Zone Authority (PEZA) and recently by the Board of Investments
(BOI), is the incentive reform. In fact, HB 7214 already directly proposes
that in order to lower the CIT, there must be a certain percentage reduction
in incentive expenses.
Still, there will be plenty of businesses that would benefit from the
lowered CIT.
The three who abstained from the vote are Teddy Brawner Baguilat
Jr. of the Lone District of Ifugao; Arnolfo A. Teves Jr. of the Third District of
Negros Oriental; and Manuel F. Zubiri of the Third District of Bukidnon.
The new version of the bill provided that, for registered enterprises
within the premises of economic zones and free ports, tax remittances will
be 15 percent between 2019 and 2020; 14 percent in 2021 and 2022; 13
percent in 2023 and 2024; 12 percent in 2025 and 2026; 11 percent in
2027 and 2028; and 10 percent in 2029 and thereafter.
The new version also provided that firms whose export sales are
below the 90-percent threshold and are located within an economic zone
will be allowed to avail themselves of value-added tax exemptions on
importation and VAT zero-rating on domestic purchases of capital
equipment and raw materials, provided they comply with electronic receipts
or invoicing prescribed in the bill.
PAMURI also said that the removal of incentives would scare away
potential foreign investors. The association warned that some companies
would migrate their operations to India, Malaysia, Vietnam and Hong Kong.
The group previously slammed the first tranche of the tax reform law,
particularly the removal of the 15% preferential tax rate for workers of the
Business Process Outsourcing sector.
The bill will reduce the corporate income tax (CIT) rate from the
current 30 percent to 20 percent in the next 11 years. It also seeks to
modernize fiscal incentives to investors, as well as level the playing field for
micro, small, and medium enterprises (MSMEs).
Despite its new moniker, the TRABAHO Bill retains the essential
features of the TRAIN 2 package, by primarily cutting down on the
country’s high corporate income taxes and streamlining existing incentives
being granted to corporations.
The measure consolidated several House Bills on TRAIN, including
House Bills 7214 and 7458, which propose different methods of cutting
down on corporate income tax rates. House Bill 7214 will cut down
corporate income tax rates depending on the annual reduction in incentive
expenses in relation to the country’s GDP, under which scheme the
corporate income tax can be reduced to as low as 25%. On the other hand,
House Bill 7458 will unconditionally decrease corporate income tax by 1%
every year, with the end goal of reducing the same to a fixed rate of 20%
by 2029. It remains to be seen which of these methods will be approved,
but the general consensus appears to be that a reduction in corporate
income tax in the following years is necessary.
The DoF lays down the premise that of the 915,000 firms registered
in 2015, only 2,844 firms were able to avail themselves of tax incentives
worth P301 billion. Juxtaposed with the fact that firms with no incentives
pay 30% regular corporate income tax, while firms with incentives pay 6%
to 13%, and the inequity becomes even more apparent. Thus, by reducing
corporate income taxes, these small and medium enterprises, which
comprise 32.86% of the national employment rate, stand to benefit the
most.
“We are therefore maintaining our forecast for the Philippines’ budget
deficit as a share of GDP to come in at 2.9 percent in 2018 and average
2.6 percent from 2019-2027,” Fitch Solutions added.
Tax rates, in comparison, only rank fifth. The government has said the
CIT cuts will make the country’s rates at par with Asian neighbors, but Fitch
Solutions said the reductions, to take effect starting 2021, will be “so
gradual that it will take until at least 2025 before they fall in line with
regional levels.”
As the measure will also limit available tax incentives, this could
offset some of the revenue loss. Succeeding CTRP packages that contain
revenue-enhancing measures, including higher taxes on “sin” products,
property taxation reforms and a bigger government share of mining
revenues, are expected to make up for the CIT losses.
Non-profit private schools and hospitals that perform well and adhere
to high standards of service will continue to enjoy the current low income
tax rate of 10 percent under the proposed corporate income tax (CIT)
reform bill pending in the House of Representatives, the Department of
Finance (DOF) said.
Finance Undersecretary Karl Kendrick Chua said the bill, dubbed the
“Tax Reform for Attracting Better and High-quality Opportunities
(TRABAHO) Act, would “incentivize” private hospitals and educational
institutions to upgrade their quality of service in order to be granted this
special tax rate, as he sought to correct misapprehensions about the
measure supposedly resulting in higher tuition payments.
The bill does not cover religious schools, which under the
Constitution, are exempted from paying income tax provided that they are
organized as non-stock non-profit corporations and no part of their net
income shall belong or benefit any member, organizer, officer or person.
Chua said the TRABAHO bill aims to ensure that students are able to go to
schools that provide quality education, through a set of performance criteria
to be determined and evaluated by the Commission on Higher Education
(CHED) and the Department of Education (DepEd). The Department of
Health (DOH), meanwhile, will establish the criteria for private hospitals to
assess their performance and their eligibility for the tax incentive, he said.
Finance Secretary Carlos Dominguez III pointed out that this example
shows that “half of the dividends were actually paid for by the public” or the
country’s taxpayers. “Now, if they don’t meet [the criteria] why should we
subsidize [schools which] don’t meet the criteria,” Dominguez said.
“Basically, we are supporting this school even though it is not helping the
students.”
Chua said the TRABAHO bill provides for a transition period for
schools and hospitals to improve the quality of service they render, before
the subpar institutions are taxed a higher rate.
Chua pointed out that the TRABAHO bill also provides the
earmarking of funds for universal health care and the grant of student
vouchers so that revenues would go directly to helping those in need.
PERSONAL EVALUATION