Tax reform for acceleration and inclusion

By
Atty. Lorna Patajo-Kapunan
-
JUNE 4, 2017
All appropriations, revenue or tariff bills, bills authorizing increase of the public debt, bills
of local application and private bills shall originate exclusively in the House of
Representatives but the Senate may propose or concur with amendments

Article VI, Section 24, Constitution

THUS, at least 55 House bills were filed proposing amendments to the National Internal
Revenue Code. These were all consolidated into substitute House Bill 5636. On May 15 the
Committee on Ways and Means released its Committee Report 229 endorsing the approval
of House Bill 5636 sponsored by Rep. Dakila Carlo E. Cua (committee chairman) and Rep.
Joey S. Salceda.

Many observations, comments, positive and negative reactions have been ventilated on the
merits of the proposed Tax Reform for Acceleration and Inclusion (TRAIN) Act. Some admit to
not even having read the actual House bill itself, which is a difficult, if not boring, read.

In the interest of transparency and a more informed discussion/

debates, I have quoted in this column the salient portions of the fact sheet prepared by the
Committee on Ways and Means, which was appended to the Committees Report to the
House endorsing approval of House Bill 5636.

Objectives:

To enhance the progressivity of the tax structure through rationalization of the internal
revenue system;

To provide equitable relief to taxpayers in order to improve their levels of disposable

income and increase their economic activity; and

To ensure that the government is able to provide better infrastructure, health, education
and social protection by raising sufficient revenues through the expansion of the value-
added tax (VAT) base, increase of the excise taxes on petroleum and automobiles,
introduction of excise tax on sugar-sweetened beverages and adoption of measures to
improve tax administration

Key provisions:

1. Amends Section 24 as follows:

Tax schedule (for compensation income earners only).

Not over P250,0000 percent

Over P250,000 but not over P400,00020 percent of the

excess over P250,000

Over P400,000 but not over P800,000P30,000 + 25 percent of the excess over P400,000

Over P800,000 but not over P2,000,000P130,000 + 30 percent of the excess over
P800,000
 Over P2,000,000 but not over P5,000,000P490,000 + 32 percent of the excess over
P2,000,000

Over P5,000,000P1,450,000 + 35 percent of the excess over P5,000,000

Effective 2020 onward, six tax brackets; but second to fourth tax bracket with reduced tax
rates of 15 percent, 20 percent, 25 percent and 30 percent, respectively

Tax schedule (for compensation income earners only).

Not over P250,000 percent

Over P250,000 but not over P400,00015 percent of the excess over P250,000

Over P400,000 but not over P800,000P22,500 + 20 percent of the excess over P400,000

Over P800,000 but not over P2,000,000P102,500 + 25 percent of the excess over
P800,000

Over P2,000,000 but not over P5,000,000P402,500 + 30 percent of the excess over
P2,000,000

Over P5,000,000 P1,302,500 + 35 percent of the excess over P5,000,000

(*provides for automatic adjustment of taxable income levels and their corresponding base
every three years beginning 2021 based on a five-year cumulative CPI inflation rate)

2. Removes the exemption for minimum-wage earners (Section 24), personal and additional
exemptions (Section 31) and deduction for premium payments on health insurance of an
individual taxpayer (Section 34);

3. Further amends Section 24 to levy on self-employed individuals/professionals whose gross

sales or gross receipts falls below the proposed VAT threshold of P3 million an income-tax
rate of 8 percent on gross sales or gross receipts in lieu of percentage tax; while those above
the VAT threshold shall be taxed the tax rate, minimum income tax and allowable deduction
imposed on
corporations;

4. Amends Section 25 by subjecting alien individuals employed by multinational companies,

offshore banking units and petroleum service contractors and subcontractors to the regular
income tax imposed on compensation income earners;

5. Amends Section 34 such that the optional standard deduction (OSD) of 40 percent of
gross income effectively applies now not only to corporations, but also to self-employed and
professionals; likewise provides that beginning 2020, the actual monetary value of the fringe
benefit and not the grossed-up
monetary value shall be allowed as deduction from gross income;

6. Amends Section 33 such that the fringe benefit tax for July 1, 2017, up to 2019 is reduced
to 30 percent from 32 percent and beginning 2020 fringe benefit shall form part of the gross
income of the individuals
recipient of the fringe benefit and will be subjected to regular income- tax rates for
individuals;

7. Amends Section 24 to now subject to 20-percent final income tax PCSO and lotto
winnings;
8. Amends Sections 84 (computation of net estate) and 86 (estate tax; increases the amount
of deduction for the family home from P1 million to P3 million and provides for automatic
adjustment of this exemption ceiling every three years beginning 2018 according to current
value using a three-year cumulative CPI inflation rate), and 99 (donors tax) to apply a
transfer tax rate of 6 percent on net estate and annual net gift, as the case may be.

9. As to VAT, amends Sections 106, 107, 108 and 109 on sales that shall remain subject to
zero percent; Sales that shall no longer be subjected to VAT zero rate upon the
establishment and implementation of an efficient VAT refund system; VAT exempt
transaction subjected to qualifications; VAT exemptions proposed to be removed;

Cooperatives

a) Sales by agricultural cooperatives duly registered with the CDA to their members, sale of
their produce and importation of direct farm inputs, machineries and equipment (including
spare parts);

b) Gross receipts from lending activities by credit or multipurpose cooperatives registered

with CDA;

c) Sales by nonagriculture, non-electric and noncredit cooperatives;

n Housing

a) Real property utilized by low-cost and socialized housing as defined by Republic Act 7279.

b) Lease of residential unit with monthly rental not exceeding P10,000;

10. As to excise tax on petroleum, the measure provides for the amendment of Section 148,
such that the tax on said products shall be increased gradually covering a three-year period;
diesel, kerosene, LPG and bunker fuel per liter from P0 to P3, P5 and P6; gasoline per liter
from P4.35 to P7, P9 and P10; lubricating oils and grease per liter and kilogram.,
respectively, from P4.50 to P7, P9 and P10; processed gas per liter from P.05 to P3, P5 and
P6; waxes and petroleum per kg; from P3.50 to P7, P9 and P10; denatured for motive power
alcohol per liter from P0.05 to P3, P5 and P6; asphalts per kg from P0.56 to P3, P5 and P6.

11. On the other hand, sugar- sweetened beverages shall be levied an excise tax of P10 per
liter of volume capacity subject to yearly
4 percent rate increase after effectivity date of January 1, 2018.

12. With regard to excise tax on automobiles, Section 149 is amended to provide for
increase of the excise tax rates from 2 percent, 20 percent, 40 percent and 60 percent; and
the current four brackets to 3 percent, 30 percent, 50 percent, 80 percent and 90 percent;
and five brackets (P600,000 and less, over P600,000 to P1.1 million, over P1.1 million to P2.1
million, over P2.1 million to P3.1 million and over P3.1 million, respectively, for 2018. For
2019 the rates shall be 4 percent, 40 percent, 60 percent, 100 percent and 120 percent;

13. Hybrid vehicles, which can run at least 30 kilometers under one charge, and pick-ups
shall be exempt from excise tax;

14. In connection with tax administrative reforms, provisions of e-receipts issuance and
transmission, fuel marking, point-of-sales (POS) machines linkage to the Bureau of Internal
Revenue (BIR) and linkage between the BIR government agencies/bureaus/offices are
introduced in the bill to address perennial tax administration problems, such as sales under
declaration, among others; penalties are also prescribed and/or made more effective for
infractions related to fuel making, nonissuance of receipts, and under declaration of sales
through sales suppression devices;
15. For three years, not more than 40 percent of the yearly incremental revenues generated
from the proposed petroleum excise tax shall be allocated to fund a social benefits program
and granting of fuel vouchers to qualified transport franchise holders, for the same period,
the remaining yearly incremental revenues shall be allocated for infrastructure, health,
education and social-protection expenditures.

16. There shall, likewise, be allocation from sugar-sweetened beverages excise-tax revenue
broken down as follows:

a) 85 percent of tax collection shall be allocated for government priority programs;

b) 15 percent shall fund programs for the welfare and benefit of sugar planters/farmers.

The House of Representatives passed on third and final reading the TRAIN before the 17th
Congress adjourned its first regular session on May 31, voting 246 in favor, nine against (the
majority from the militant Makabayan bloc who claim that it is antipoor) and a lone
abstention by opposition lawmaker Rep. Edcel C. Lagman of Albay.

On VAT exemptions, the House retained the 12-percent VAT exemption for cooperatives,
following strong opposition to its repeal. senior citizens and persons with disabilities (PWDs)
remain exempted from VAT. However, the bill removed the VAT exemption on the lease of
residential units with a monthly rental not exceeding P10,000. VAT-exempt are power or fuel
generated through renewable sources of energy, such as, but not limited to, biomass, solar,
wind, hydropower, geothermal, ocean energy and other emerging energy sources using
technologies, such as fuel cells and hydrogen fuels. Automobiles shall be levied incremental
taxes effective January 1 next year. The controversial excise tax on petroleum products was
retained despite strong opposition from various quarters.

In my view, it is an achievement that TRAIN left the House in record time. But a tax-reform
package is not enough to meet the P366 billion needed by the government for
infrastructure, education and health care per year from 2016 to 2022 under the AmBisyon
Natin 2040 socio-economic program of the government. Reforms in tax administration,
efficiency in collection by the concerned bureaus, prosecution of tax evaders, must also be
put in place. Tax authorities can achieve and sustain the needed rapid increases in tax
collections only by directly confronting the existing large tax gap (the difference between
actual and potential collections) or conversely, the narrow tax base. If jobs are created by
increased government spending on projects, which will provide employment to the
unemployed, or if the climate for private-sector investment is conducive to job-creating
industries and manufacturing in the country, then widening the tax base (or the number of
employed) can be achieved. And last but not the least, it is necessary that the tax collected
is spent correctly to fund infrastructure, health, education and social-protection
expenditures, and not plundered for private gain. Only then can we eradicate extreme
poverty suffered by the majority among our countrymen.

The Senate is expected to raise certain objections to provisions on the House version, which
are allegedly antipoor and antiminimum- wage earners. It promises to have a better tax-
reform package when it tackles as high priority the Senate version at the opening of its
sessions in July. Dont hold your breath!