On Dec. 19, President Rodrigo Duterte signed into law Republic Act 10963, also known as the Tax Reform for Acceleration and Inclusion (TRAIN), to promote a simpler, more equitable and efficient tax system. Said law will become effective beginning Jan. 1 after fulfilling the publication requirement.
This first tax reform package (out of five total) contains amendments to several provisions of the National Internal Revenue Code of 1997, specifically on individual income tax, donor’s and estate tax, value added tax (VAT)/ percentage tax, excise tax on certain products and services, documentary stamp tax (DST) and certain administrative procedures.
The revisions contained in TRAIN include:
PERSONAL INCOME TAXATION
Personal income tax exemption for individuals deriving purely compensation income and/or self-employed and professionals is increased to P250,000, regardless of civil status or qualified dependents. The threshold amount for tax-exempt 13th month pay and other benefits is increased to P90,000 (previously P82,000).
The foregone tax collection as the result of the increased exemption will be passed on to high income earners who will be taxed at a maximum rate of 35% (previously 32%) for taxable income in excess of P8 million.
Moreover, under TRAIN, purely self-employed and professional individuals (e.g., independent agents/distributors, freelancers) whose total income (i.e., gross sales/receipts and other non-operating income) does not exceed P3 million will have the option to be taxed at 8% of gross sales/receipts and other income in excess of P250,000 in lieu of the graduated rates and percentage tax.
INCREASE IN CERTAIN PASSIVE INCOME TAX RATES
Capital gains tax on sale of unlisted shares of stock and interest income from foreign currency bank deposits derived by citizens, resident aliens and domestic corporations are subject to an increased final tax of 15%.
Moreover, beginning 2018, PCSO and lotto winnings exceeding P10,000 will be subject to 20% final tax.
INCREASED FRINGE BENEFIT TAX (FBT)
Effective Jan. 1, fringe benefits given to non-rank and file employees are subject to 35% FBT (previously 32%). The grossed-up monetary value is determined by dividing the actual monetary value by 65%.
ESTATE TAX REVISIONS
Estate taxation was changed from graduated rates to a flat rate of 6% based on the value of the net estate. The net estate is derived by deducting the allowable expenses from the gross estate of the decedent. To simplify, certain allowable deductions were removed under the revised law. For a citizen or resident decedent, funeral expenses, judicial expenses, and medical expenses are no longer deductible, but the amount of standard deduction and deduction for the family home is increased to P5 million and P10 million, respectively.
Meanwhile, for non-resident decedents, allowance for deduction of expenses, losses, indebtedness and taxes were removed but additional provisions were included allowing a standard deduction of P500,000 and claims against the estate and insolvent persons, and unpaid mortgages as deductions from the estate.
DECREASED DONOR’S TAX
Donors shall be subject to a fixed rate of 6% (previously at graduated rates) based on total gifts in excess of P250,000 during the calendar year, whether or not the donee is a stranger. Moreover, dowries or gifts made on account of marriage of P10,000 are no longer exempted from donor’s tax.
The sale, exchange or transfer of property made in the ordinary course of business (i.e., a bona fide transaction conducted at arm’s length and free from any donative intent) shall be considered as made for adequate and full consideration. Thus, no donor’s tax should be imposed.
Certain provisions on VAT zero-rating of sale of goods and services and VAT exempt sales were adjusted. The definition of sale or exchange of services was expanded to include the sale of electricity by generation companies, transmission by any entity, and distribution companies, including electric cooperatives.
In terms of creditable input VAT on the purchase of local or imported capital goods, amortization of the input VAT shall only be allowed until Dec. 31, 2021, after which, taxpayers with unutilized input VAT on capital goods shall be allowed to apply the same as scheduled until fully utilized.
Moreover, the VAT refund period for excess creditable input VAT is shortened to 90 days (previously 120 days) from the date of submission of the relevant documents supporting the claim. Penalties shall be imposed on BIR officials who fail to act on the application within the 90-day period.
In case of denial of the refund claim by the Commissioner, the legal and factual basis for the denial must be stated in writing. In case of full or partial denial of the VAT refund claim, the taxpayer may file an appeal with the Court of Tax Appeals (CTA) within 30 days from receipt of the BIR denial.
As regards sales to the government, the VAT withholding system shall shift from final to creditable effective Jan. 1, 2021.
INCREASE IN PERCENTAGE TAX ON SALE OF LISTED/TRADED SHARES
Disposal of listed shares through the Philippine Stock Exchange or through Initial Public Offering is subject to percentage of 6/10 of 1% based on the gross selling price or gross value in money of the shares of stock.
ADJUSTMENTS TO EXCISE TAXATION
Under the new tax law, the excise tax coverage is expanded to include services performed in the Philippines. Moreover, the excise tax rates for certain products such as cigarettes, automobiles, petroleum and mineral products among others, are increased.
Specifically, the excise tax on cigarettes both packed by hand and machines will be taxed at P32.5 per pack starting Jan. 1 which will gradually increase to P40 per pack by Jan. 1, 2022. Beginning Jan. 1, 2024, the tax rate imposed shall be increased by 4% every year thereafter.
The excise tax on automobiles, on the other hand, is adjusted to 4%; 10%; 20%; 50% depending on the value of the vehicle. However, hybrid vehicles will only be taxed at 50% of the applicable excise tax rates. Moreover, exemptions from excise tax are given to purely electric vehicles and pick-up trucks.
Sweetened beverages which use purely caloric sweeteners and purely non-caloric sweeteners, or a mixture of both, are subject to excise tax of P6 per liter. Meanwhile, beverages which use purely high-fructose corn syrup or in combination with any caloric or non-caloric sweetener, are taxed at P12 per liter. Tax exemptions are given to beverages using purely coconut sap sugar/purely steviol glycosides as sweetener.
The following products, however, are not considered excisable products under this new provision: (1) All milk products; (2) 100% natural fruit and vegetable juices; (3) Meal replacement and medically indicated beverages; and (4) Ground coffee, instant soluble coffee, and pre-packaged powdered coffee products.
Non-essential services, specifically the performance of cosmetic surgeries, procedures, and body enhancements for aesthetic purposes, shall generally be subjected to 5% tax on gross receipts.
DOUBLING OF DST
Almost all DST rates were doubled except for certain insurance policies and sale of real property.
SIMPLIFIED TAX RETURNS
Income tax returns for individuals and corporations shall be limited to a maximum of four pages for both paper and electronic form. Taxpayers will have to wait until their 2018 tax filings to avail of this benefit. To be clear, the income tax return to be filed for taxable year 2017 should still be the existing tax forms, even if filed in 2018.
AMENDMENTS TO COMPLIANCE REQUIREMENTS
There are also revisions to certain compliance requirements such as keeping of books of account, registration requirements, and issuance of receipts or sales invoices. For example, taxpayers with gross annual sales/earnings/receipts exceeding P3 million must have their books audited by a certified public accountant.
The threshold for taxpayers to mandatorily register for VAT was increased from P1.9 million to P3 million. Moreover, persons who elect to pay the 8% tax on gross sales/receipts, in lieu of the graduated income tax rates, shall not be allowed to avail of the option of registering for VAT.
With so many changes, questions may arise in terms of the interpretation of some provisions and the intention of our lawmakers. The tax authorities will have to provide implementing guidelines to minimize confusion in the interpretation of the new tax provisions.
One example is the taxation on employees of regional or area headquarters (RHQs), regional operating headquarters (ROHQs) of multinational companies, offshore banking units (OBUs) and petroleum service contractors and subcontractors. Under the current rules, alien individuals and qualified Filipinos employed by such entities are subject to a final withholding tax of 15% on their gross compensation income.
Based on the bicameral report that was sent to the President for approval, an additional paragraph was inserted into the Tax Code stating that the 15% tax rate will no longer be available to employees of ROHQs/RHQs/OBUs etc. that will be registered with the Securities and Exchange Commission beginning Jan. 1 2018. However, present and future qualified employees of such entities existing as of Dec. 31, 2017 shall continue to enjoy the preferential tax treatment.
On Dec. 22, the Office of the President issued a veto statement removing the proposed sunset provision since it violates the Equal Protection Clause under the 1987 Constitution. It said the removal of such incentives will promote fairness and equity of tax system for individuals performing similar nature of work.
While it would appear that the intention is to totally eliminate the 15% preferential tax rate, the provisions under Sections 25 (C), (D) and (E) of the Tax Code were not repealed since such repeal has to come from the legislature. Thus, the Tax Code provision providing for the 15% employee tax rate appears to remain intact as of this writing.
The passing of the TRAIN law surely has its benefits. Indeed, this is good way to start the year 2018.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Wendy Go is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of PwC global network.