TRAIN LAW

The Tax Reform for Acceleration and Inclusion (TRAIN) is the first
package of the comprehensive tax reform program (CTRP) envisioned by
President Duterte’s administration, which seeks to to correct a number of
deficiencies in the tax system to make it simpler, fairer, and more efficient.
It also includes mitigating measures that are designed to redistribute some
of the gains to the poor.

Through TRAIN, every Filipino contributes in funding more infrastructure and

social services to eradicate extreme poverty and reduce inequality towards
prosperity for all. TRAIN addresses several weaknesses of the current tax
system by lowering and simplifying personal income taxes, simplifying estate
and donor’s taxes, expanding the value-added tax (VAT) base, adjusting oil
and automobile excise taxes, and introducing excise tax on sugar-sweetened
beverages.

It appears that the new TRAIN Law could also turn out to be like our MRT-3
and PNR train systems that lack safety devices. Of course, the government
assures us that inflationary spikes in the prices of basic goods and services
resulting from the law’s implementation are only temporary. But
commentators say the law benefits only those Filipinos in the formal sector
with incomes of P250,000 and below. As Ibon Foundation observes, the law
will really affect the 22.7 million families who do not pay income taxes
because they belong to the informal sector composed of minimum wage
earners with low and erratic incomes.
Even now, the feedback from my random talks with people in the street is
that prices, particularly of food, have begun to increase. To think that food
constitutes around half of the expenditures of families earning less than
P250,000, per data from the Philippine Statistics Authority. Of course, the
government has provided safety nets such as the cash transfer program and
particular programs of the Commission on Higher Education and the
Departments of Health, of Education, of Tourism, of Trade and Industry, and
of Finance. But these schemes may be insufficient to lighten the burden of
rising food prices among the poor, not to mention the mentality of
dependency they create.
What can be done, too, is to intensify community participation through the
initiatives of government agencies. Local government units can be mobilized
to implement IECM (information, education, communication and motivation)
programs that will

motivate communities to practice what is called in development economics a

“use economy”—i.e., a system that encourages local residents to be self-
reliant in producing their basic needs for internal consumption. In this
approach, there is a negation of the commoditizing effects of the capitalist
economy that conditions residents to always purchase goods in the market.
After attaining self-sufficiency in the production of life-sustaining needs, a
self-reliant town can engage in the surplus production of goods for selective
exchange to supply its other needs.
After the motivation campaign, one logical move for LGUs to augment food
production is to strictly enforce the provisions of the Local Government
Code, one of which is to enhance local development through maximization of
lands for productive use. In fact, only last year President Duterte threatened
to double the taxes on idle lands that will not be developed within a decade.
Through supplementary ordinances, LGUs can make formal arrangements
with landowners for their vacant lands to be used by residents, cooperatives,
farmers’ groups and nongovernment organizations for food production. A
case in point is Muntinlupa City, which has initiated the imposition of an ad
valorem tax on idle lands.
The Departments of Agriculture and of Agrarian Reform should then come in
with their extension services in providing assistance on food production in
both urban and rural areas. Even in cities, idle lots can be used for
vegetable, fruit and livestock production as well as food processing. The
Inquirer, for example, has reported on the “Gulayan at Bulaklakan” project
in Barangay Holy Spirit, Quezon City, where residents now grow vegetables,
flowers and fruits in plots, terraces, sidewalks, pots, recycled pails and used
tires, which is reminiscent of what Singapore is currently practicing.
As shown by land-deficient Singapore, we don’t even need much land to help
the government achieve its goal of food security. Jack Ng, for instance, is
well-known in Singapore for introducing vertical farming, which is five times
more productive than a regular farm. His innovative technology also uses
less water and produces safer organic products. Our blessing in the
Philippines is that we have much more available land and also advanced
technology from our reputable agricultural institutions that are just waiting
to be tapped to temper the runaway food prices induced by the TRAIN Law.

TRAIN: a risk or opportunity?

When President Duterte signed the Tax Reform for Acceleration and
Inclusion (TRAIN) Act into law last December, a number of leading
economists lauded the move. After all, the first package of the tax reform
law is arguably the Duterte administration’s most important legislative
victory to date. In his speech, the President remarked that the passage of
the TRAIN is the administration’s biggest Christmas gift to the Filipino
people. The lower income tax rates were supposed to provide Filipinos with
higher disposable incomes, which, in turn, could boost domestic
consumption. The TRAIN will also generate revenues to finance much-
needed social and physical investments — the necessary foundations for
sustaining rapid economic growth. Citing these developments, several
multilateral institutions and ratings agencies upgraded their economic
forecasts for the country.
But as the law took effect at the start of the year, the optimism toward the
TRAIN became more subdued as consumers anticipated the pinch of higher
commodity prices. Electricity rates, for instance, are expected to go up by 8
centavos per kilowatt-hour. This means that a household consuming 200
kWh monthly will see a P16 increase in its electricity bill.
Even before excise taxes on fuel kicked in, oil prices have already increased,
reflecting movements in international oil markets. The new taxes on fuel will
then squeeze consumers’ pockets even more.

While the government has assured the public that inflationary effects
resulting from the TRAIN will be minimal, the central bank acknowledged
that it may raise interest rates if secondary impacts, including higher prices
of consumer goods indirectly affected by the TRAIN, as well as a clamor for
higher wages, would push inflation beyond target.
At the core of the debates on the TRAIN is its impact on ordinary Filipinos,
especially those who are earning below minimum wage—the same segment
exempted from income taxes but who will have to bear the brunt of higher
commodity prices. To cushion this inevitability, the government will provide
targeted cash transfers to the poorest 10 million Filipinos, arguing that this
is a more efficient way of protecting the poor. The 2018 budget earmarks
around P25 billion to cover monthly cash transfers of P200. But cash transfer
programs are typically riddled with issues including duplicate or fraudulent
households, the untimely release of funds, and unliquidated funds due to
distance or ineligible beneficiaries. Moreover, the Department of Social
Welfare and Development, the agency tasked to implement cash transfers,
remains without a head after the Commission on Appointments rejected Mr.
Duterte’s appointee five months ago. Thus, while targeted earmarks are a
positive step toward boosting social investments, the government still needs
to iron out kinks in its program implementation. With no mitigating measure
in place, poor households will undoubtedly lose out on the tax reform.
To the government’s credit, it has been aggressively pursuing efforts to
make the economic environment more attractive for investors. The
Department of Finance recently submitted its proposal for Package 2 of its
tax reform program to Congress. The second package aims to reduce
corporate income tax rates and rationalize fiscal incentives. In crafting future
packages, however, the administration should refrain from levying new taxes
that will further burden ordinary Filipinos. Instead, measures that would
make the tax system more efficient, simplify compliance among taxpayers,
and plug leakages and loopholes in the system should be prioritized.
Of course, the challenge is for revenue collection agencies to meet their
collection targets and for implementing agencies to spend incremental
revenues efficiently. Rolling out key projects within the timelines will also be
a given challenge. As I have pointed out in earlier commentaries, imposing
new taxes without the commensurate tangible reforms in efficient and
transparent administration will be a bitter pill for the average Filipino to
swallow.

Eduard G. Gialogo:

As a tax lawyer, I noticed that there are a lot of news reports on the
changes. But actually, there are much more significant changes under the
Train law which are not being reported.

Train relatively decreases the tax on personal income, estate, and donation.
However, it also increases the tax on certain passive incomes, documents
(documentary stamp tax) as well as excise tax on petroleum products,
minerals, automobiles, and cigarettes.
The Train law also imposes new taxes in the form of excise tax on
sweetened beverages and non-essential services (invasive cosmetic
procedures) and removes the tax exemption of Lotto and other PCSO
winnings amounting to more than P10,000.

Personal Income Tax

The most popular part of the Train law is the reduction of personal income
tax of a majority of individual taxpayers. Prior to the enactment of the new
law, an individual employee or self-employed taxpayer would normally have
to pay income tax at the rate of 5% to 32%, depending on one's bracket.

Under Train, an individual with a taxable income of P250,000 or less will now
be exempt from income tax. Those with a taxable income of above P250,000
will be subject to the rate of 20% to 35% effective 2018, and 15% to 35%
effective 2023. Moreover, the deductible 13th month pay and other benefits
are now higher at P90,000 compared to P82,000 under the old law.

Another innovation under Train is the option of self-employed individuals

and/or professionals whose gross sales or receipts do not exceed P3,000,000
to avail of an 8% tax on gross sales or gross receipts in excess of P250,000,
in lieu of the graduated income tax rates.

It is not being highlighted, however, that some items that were previously
deducted to arrive at taxable income had been removed under Train. These
are the personal exemption of P50,000, additional exemption of P25,000 per
dependent child, and the premium for health and hospitalization insurance of
P2,400 per year.

Estate Tax

The estate tax rate was also changed from 5% to 32% of the net estate to a
flat rate of 6%. Additionally, the following deductions allowed in computing
the net estate (to be subjected to estate tax) were increased:

Donor’s tax

The donor’s tax rate was also amended to a single rate of 6% regardless of
the relationship between the donor and the donee. In the old law, the rates
of donor’s tax were 2% to 15% if the donor and donee are related, and 30%
if otherwise. However, the donation of real property is now subject to
Documentary Stamp Tax of P15 for every P1,000.

Value Added Tax

There are also amendments to VAT which lessen the burden of taxpayers:

1. Increase of VAT threshold from P1,919,500 to P3,000,000

2. Starting 2019, the sale of drugs and medicines for diabetes, high
cholesterol, and hypertension will be exempt from VAT
3. Increase of VAT exemption for lease of a residential unit from
P12,800 to P15,000
 4. Association dues, membership fees, and other assessments and
charges collected by homeowners associations and condominium
corporations are now expressly VAT exempt

Increased taxes

Passive Income

Train imposes higher taxes on some passive incomes, including interest

income from dollar and other foreign currency deposits.

Excise Tax

Train imposes higher excise taxes on cigarettes, manufactured oils

(petroleum products), mineral products and automobiles.

Non-essential services

Invasive cosmetic procedures directed solely towards improving, altering, or

enhancing the patient’s appearance is now subject to excise tax of 5%.

PCSO winnings

Previously, PCSO winnings, regardless of amount, were exempt from tax.

Train subjects PCSO winnings to a 20% final withholding tax if the amount is
more than P10,000.

Simplified tax compliance

Apparently, the Philippine tax system is a very complicated one. This was
certainly considered by Congress when it enacted the Train law.
Consequently, Train introduces amendments which are geared towards
simpler tax compliance. Some of these amendments are:

1. The Income Tax Returns shall not be more than 4 pages

2. The Tax Return for final and creditable withholding taxes shall be
filed quarterly instead of monthly
 3. With regard to estate tax, the following measures were adopted
to simplify its computation and payment:
o In lieu of actual funeral expenses (up to P200,000) and
medical expenses (up to P500,000), Train increases the
standard deduction (wherein no substantiation is required)
from P1,000,000 to P5,000,000
o Notice of death is no longer required
o CPA certification is now required only if the gross estate is
above P5,000,000 (up from P2,000,000)
o The deadline for filing of estate tax return is now one year
from death (before, 6 months from death)
o Bank deposits left by the decedent may be withdrawn by
the heirs subject only to 6% withholding tax. Before a
certification from the BIR that estate tax has been paid was
required.
4. Beginning January 1, 2023, the filing of VAT Return and payment
of tax shall be done quarterly instead of monthly
5. The BIR is required to act on application for VAT refund within 90
days. Otherwise, the BIR official, agent or employee will be
criminally liable.
6. The Financial Statements of a taxpayer should be audited if the
gross annual sales, earnings, receipts or output exceed
P3,000,000 (up from P150,000)

With the enactment of the Train law, the government expects to generate
more revenues to fund its "Build, Build, Build" projects and other programs.
At the same time, the labor sector is expected to be freed from the burden
of outdated and inequitable personal income tax. Hopefully, this benefit for
the workers can still be achieved despite the increase in prices of some
goods that they consume.