TRAIN: What are Included in The Philippine Tax Reform That Will Be Implemented in 2018?

One of the most important sources of a nation’s revenue comes from taxes – and achieving a highly strategic taxation system can make a huge difference especially for developing countries and emerging economies like the Philippines.

It was only recently when President Rodrigo Duterte signed the tax reform, TRAIN, into law – and it represents the first batch of several packages that will compose a new overall system in collecting taxation duties for private and public individuals and organizations.

What is the new TRAIN Law?

The TRAIN (Tax Reform for Acceleration and InclusioN) Law, includes changes in the amount of tax collected (or exempted) among working individuals as well as duties on commonly consumed products in the country. The primary goal of TRAIN, first and foremost, is to help generate enough revenue of over PHP 8 trillion in order to fund the Duterte’s government’s infrastructure program and other services.

Which tax duties are included in the new tax reform?

As the first wave of Pres. Duterte’s new taxation measures, included in the newly passed TRAIN law are amendments and additions in several minor and major tax duties for citizens and non-residents. Each will be thoroughly discussed below.

Moreover, it’s also important to take note of the income tax changes that are now being implemented nationwide as well as the introduction of new tax duties on particular categories of some products that are popularly consumed by Filipinos.

Here they are:

1. Value Added Tax (VAT)

Several products and services will benefit from a VAT exemption and these include medicines and drug prescriptions (starting 2019).  Such exemptions will also cover tax collections for membership fees, basic charges as well as assessment fees paid to homeowners’ associations (including condominium corporations), and other association dues.

The VAT threshold has also been increased to PHP 3 million, from the original threshold of PHP 1,919,500.  VAT exemption for residential unit leases has also been increased from to PHP 15,000 from the old PHP 12, 800.

2. Taxes for Passive Income

While tax exemptions are the highlight of the new tax reform, the imposition of higher taxes can be observed in other sectors such as industries and individuals relying on passive income. For instance, included in the higher tax required under this section are interest incomes from currency deposits like the U.S. dollar, sales of shares and stocks, as well as PCSO winnings (from an exempt status, to a 20% increase, if the value is more than PHP 10,000).

3. Personal Income Tax

Perhaps the most highlighted change on the exemption threshold for Personal Income Tax is the most popular aspect of the TRAIN Law because it affects a majority of Filipino taxpayers.

Employed by a company or organization

Originally, employed individuals pay an income tax rate from a range of 5% to 32% (the rate is determined based on one’s income bracket). However, under TRAIN, employees will now be exempted from paying personal income taxes as long as their annual taxable income amounts to PHP 250,000 or less.

Annual incomes above PHP 250,000, on the other hand, will be required to pay (depending on their bracket) 20% to 35% of personal income tax (starting 2018) and will be adjusted to 15% to 35% come 2023.

For taxes imposed on the 13^th-month pay and other benefits, deductible amounts are now higher: from PHP 82,000 to PHP 90,000.

Self-employed professionals

Individuals with a “self-employed” status can benefit from an 8% tax duties as long as their gross sales do not exceed PHP 3 million.

4. Excise Tax

Tax duties on consumer goods such as tobacco, alcohol, sweetened beverages, mineral products, products derived from petroleum, as well as the purchase of automobiles, and other non-essential services (like cosmetic procedures which are subject to a 5% excise tax), have been imposed under the TRAIN law.

Excise Tax exemptions will only cover electric vehicles and pick-ups, while hybrid vehicles will be automatically subjected to a 50% tax duty.

5. Other tax duties

Documentary Stamp Tax (DST)

The tax reform also imposes an increase in DST on a majority of taxable documents. Changes on DST also covers donation of real property, wherein the new law requires a PHP 15 Documentary Stamp Tax for every PHP 1,000.

Luxury Industry Products and Services

High net-worth individuals will pay more taxes for purchases on luxury items such as jewelry, yachts, and automobiles. Revenues from casino operations are also obligated to pay more taxes.

Estate Tax

The tax rate for Estate Tax dues will be increased from the old law’s 5%-32% (net estate) to a fixed rate of 6%.  Additionally, the allowed deductions for net estate computations were increased.

Donor’s Tax

Donor taxes imposed on gifts and donations were amended to a flat rate of 6%. The percentage will be imposed regardless of the relationship between the giver (donor) and the beneficiary (donee). This amendment was a huge leap from the old tax law where donors and beneficiaries were subject to different tax percentage rates (2%-15% if they are related, and 30% if they are not blood relatives).

Conclusion

The Philippine government’ Department of Finance, as well as the supporters of the new tax reform, believes that the TRAIN Law provides a smooth highway towards a brighter future of rapid modernization and development of infrastructure in major Philippine cities.

According to experts, the new tax system is still in its early stages and it’s hard to predict how fast it can aid economic growth in the country in the long run. Similarly, Filipino citizens and non-residents who are covered in the amendments and additional taxation policies are still evaluating how the reform will affect several aspects of their lifestyle and business.