TRAIN LAW 2 or TRABAHO BILL

Refers to the second package of tax reforms being pursued by the administration. (We’ll simply
refer to it as Package 2 in order to avoid confusion.) Conceptually, the entire tax reform package
aims to make the tax system simpler, fairer, and more transparent. In general, these proposals
revise certain provisions of the tax code, the law containing all the important tax provisions of the
country, and amend or repeal the various other special tax laws which might be in conflict with
the spirit of the reforms.
The first package—or Tax Reform for Acceleration and Inclusion (TRAIN) law—updated
provisions which directly affected households and consumers: personal income tax, various excise
taxes, and other consumption taxes such as the Value Added Tax, and others.
Package 2 is not another round of excise taxes like TRAIN, but rather deals with provisions in the
tax code related to businesses and corporations. There are two main versions of the proposed
package: a version passed by the House of Representatives (HB 8083), entitled “Tax Reform for
Attracting Better and High-Quality Opportunities” (TRABAHO); and a version filed by
Senator Vicente Sotto in the Senate (SB 1906).
In a nutshell, these versions contain two components: a lowering of the corporate income tax rate
and the rationalization and modernization of Fiscal Incentives. The proposal also contains
administrative reforms.
ON LOWERING THE CORPORATE INCOME TAX RATE
Businesses in the Philippines pay the highest corporate tax rate in the ASEAN region—30%,
compared to an average 22.5% rate in our neighbouring countries. Cutting taxes on corporations
makes our businesses more competitive. By lowering taxes, businesses will face lower costs and
higher profit margins, potentially generating more employment and investment.
TRABAHO will lower the tax rate paid by corporations by 2% every two years, settling on a final
tax rate of 20% by 2029. On the other hand, SB 1906 will immediately bring the tax rate down to
25% in 2019. Of course, we don’t want the big corporations to benefit from a huge tax cut.
However, a lower tax rate would also benefit 90,000 small and medium enterprises compared to
the 4,000 large businesses in the country. The main drawback to lowering taxes would be a
substantial loss in government revenue. The Department of Finance estimates that lowering the
corporate income tax rate from 30% to 29% in 2019 would result in P26 billions of uncollected
revenue. This revenue is important as it enables the government to provide crucial services such
as healthcare and education and to pursue the administration’s infrastructure plans (Build, Build,
Build).
ON RATIONALIZING AND MODERNIZING FISCAL INCENTIVES: Some firms,
especially foreign ones located within special economic zones that enjoy special tax breaks, say
that they are likely to relocate to countries with more favourable incentives—resulting in job
losses and capital flight. Currently, many firms are able to enjoy privileges for an unlimited amount
of time. Allowing already profitable firms to enjoy incentives forever is like a parent giving
allowance to their working children who are well into their 30s. Incentives are also given almost
indiscriminately—these benefit large corporations, despite an unclear contribution to the rest of
the country.
Fiscal incentives are tax privileges given by the government to businesses in order to
encourage investment, expansion, and innovation, especially in important industries. These
are done through income tax holidays, preferential tax rates, and other special privileges. Ideally,
these should help emerging or innovative businesses which may not yet have a competitive
advantage, but would potentially produce long-term benefits for our developing economy. Our
inefficient fiscal incentives system represents taxes which could have been collected but were not.
In 2015, a total value of P104 billion was spent on tax incentives to benefit 2,844 firms—many of
which have belonged to the most profitable corporations in the country.

Package 2 aims to correct this by harmonizing dozens of incentive laws into one Omnibus
Investment Code, modernizing the available incentives given to firms, making incentives time-
bound and based on key performance indicators, institutionalizing a more Strategic Investment
Priorities Plan, and increasing the transparency and accountability of receiving firms through
stronger and more responsive governance.
Much concern has been raised over the clause in the Senate version, which repeals Section 12 of
RA 8047, the Book Publishing Industry Development Act of 1996. This repeal would remove the
exemption of books, magazines, periodicals, and newspapers, as well as publishing, printing, and
distribution from value added tax and other import fees and duties, which could potentially raise
the price of educational materials. But the Philippines signed the Florence Agreement, a 1950
UNESCO Treaty wherein countries agreed not to impose customs duties on educational, scientific,
and cultural materials. Whether or not the special law is repealed, the international treaty will
be followed—our books will not be taxed higher.
In the long run, these are necessary reforms. However, there are costs we will immediately
face. There will be transitionary pains as these companies move out and the more strategic
industries are emphasized. Thus, our policy-makers have to make reasonable compromises and
transitory adjustments that will mitigate the short-run costs while pursuing the long-run benefits
of the reform. (Montesa, 2018)

The proposed second package for the TRAIN 2 program will have impactful effects on businesses.
In sum, the bill proposes to implement fixed rates when it comes to corporate taxation and time
limits on some important business incentives.
Here is the breakdown of important TRAIN 2 stipulations that may affect your business:

 Corporate Income Tax: The bill seeks to empower more corporations to do business in the
country. This is why corporate income tax will be lessened to 25% from the previous 30%.
Starting in January 2019, it will be reduced by 1% annually for domestic corporations,
resident foreign corporations and non-resident foreign corporations. However, the bill also
 ensures that corporate income taxes will not be lower than 20%. Further, optional tax rate
of 15% of the corporation's gross income was deleted.

 Intercorporate Dividends: The final withholding tax of 15% is retained and the required
allowed credit against the tax due from the taxes deemed to have been paid in the Philippines
was reduced from 20% to 15%, or the difference between the regular corporate income tax
rate and 15% tax on dividends beginning 01 January 2019.

 Capital Gains: Major changes in capital gains will also be recorded as its increase will offer
businesses some serious pros and cons. All shares of stocks not traded in the stock exchange
will be taxed at a fixed rate of 15%.

 Changes in Tax Exemptions: The previously granted income tax exemptions for local
water districts were removed. This imposition will most likely push their prices up in the
country. In addition, income tax exemption of regional or area headquarters (RHQ) was also
removed.

 Optional Standard Deductions: The OSD will be lowered from 40% to 20% of the gross
income of individuals and corporations. However, non-resident aliens (for individual) and
non-resident foreign corporations the OSD at the rate of 40%.

 Input VAT Refund: The option to apply for a Tax Credit Certificate (TCC) on the refund
of input VAT is removed for those attributable to zero-rated sales or transaction. This is a
big impact to businesses especially the Philippine Economic Zone Authority (PEZA)
accredited entities who listed the refund as a benefit.

 Preferential Tax Rates: Preferential income tax rate of 10% of proprietary educational
institutions and hospitals are removed. The preferential income tax rate of 15% enjoyed by
financial and offshore banking units (OBU) and regional operating headquarters (ROHQ) in
the country are likewise removed.

 Changes in Special Income Tax Rates: Special income tax rates given to non-resident
cinema film owners, lessors or distributors, owners or lessors of vessels chartered by
Philippine nationals, and owner or lessor of aircraft, machineries and other equipment will
no longer apply. Interest income of a resident foreign corporation from a depository bank
under the expanded foreign currency deposit system is now increased from 7.5% to 15%
final income tax rate.

 Franchise Taxes: Telecommunication corporations are now included in the scope of the
3% franchise tax. Further, telecommunication, radio and/or television broadcasting
corporations are now required to be VAT-registered. On the other hand, the Php10 Million
gross receipts threshold for franchise tax is removed.

 Determination of gain or loss on exchange of properties: The tax-free exchange

application (Section 40(C) (2) of the Tax Code was expanded to cover exchange of
properties between parties pursuant to a reorganization.
Real score behind TRAIN 2 Incentive Reform
According to the Business World report, there are four (4) House bills pushing for these incentives
reform. Eventually, the committee agreed to consolidate it under the Tax Reform for Attracting
Better and High-quality Opportunities (TRABAHO) bill.
The bill pushes for the reorganization of the Financial Incentives Review Board (FIRB) and will
be deemed as the "principal authority" handling the issuance of incentives. Other incentive
issuances of implementing arms such as PEZA and the Board of Investments (BoI) are still subject
to the approval of the FIRB.
Aside from the involvement of the Department of Finance Secretary, who is now acting as the co-
chair of the FIRB, certain incentives will no longer be up for indefinite renewals. Most of the
business incentives will become time bound such as the income tax holidays and 15% preferential
income tax. The average time period to avail the incentive is around 4 to 5 years but on the other
versions of the bill, it can go up to 15 years.
Some incentives are also added that will be beneficial to select industries such as manufacturing
and mining. In the proposed packages, the manufacturing sector can receive reinvestment
allowances and duly exemption on raw materials.

REFERENCE/S
https://kmcmaggroup.com/research-insights/2019/how-train-2-will-affect-businesses-in-the-
philippines/

https://www.spot.ph/newsfeatures/the-latest-news-features/75316/trabaho-bill-difference-train-
a1944-20181003-
lfrm?fbclid=IwAR2YtAkzSZA4Trhrd0nSkKm2eGulabX0_r2H2YHxx9WGzRiZ4VhyQ6ECgrg
The TRABAHO Bill
(TRAIN LAW 2)

DASIGAN, SHEILA MAE D.

AC21KB2
MR. EDGAR MOLINA

OCTOBER 1 2019