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Tax Reform for Acceleration and Inclusion

(TRAIN ACT)

THE TAX REFORM FOR ACCELERATION AND INCLUSION (TRAIN) ACT

TRAIN Act or Tax Reform for Acceleration and Inclusion Act is signed into law as Republic Act No. 10963
by President Rodrigo Roa Duterte as a part of the first package of the TRAIN Act on December 19, 2017
in Malacanang.
In a separate message, President Duterte has dismissed certain provisions of the TRAIN. The five line items
are the following provisions:
1. Reduced income tax rate of employees of Regional Headquarters (RHQs), Regional Operating
Headquarters (ROHQs), Offshore Banking Units (OBUs), and Petroleum Service Contractors and
Subcontractors;
2. Zero-rating of sales of goods and services to separate customs territory and tourism enterprise zones;
3. Exemption from percentage tax of gross sales/receipts not exceeding five hundred thousand pesos
(P500,000.00);
4. Exemption of various petroleum products from excise tax when used as input, feedstock, or as raw
material in the manufacturing of petrochemical products, or in the refining of petroleum products, or as
replacement fuel for natural gas fired combined cycle power plants; and
5. Earmarking of incremental tobacco taxes.
The TRAIN raises significant revenues to support the President’s priority social and infrastructure
programs, which will help realize his administration’s goal of reducing the poverty rate from 21.6 to 14
percent by 2022. Some 70 percent of the incremental revenues will help fund the government’s
infrastructure modernization program, while the balance will go to social services.
Starting 2018, the government expects to raise funds equivalent to about two-thirds of the incremental
revenues targeted under this tax reform law. The Congress has committed to pass the rest of the TRAIN’s
provisions representing the remaining one-third of the targeted revenues in early 2018 to help us achieve
our revenue and deficit targets.
Reduced taxes
- 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:

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


 Starting 2019, the sale of drugs and medicines for diabetes, high cholesterol, and hypertension will
be exempt from VAT
 Increase of VAT exemption for lease of a residential unit from P12,800 to P15,000
 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.
There is also a significant increase in the tax on sale of shares of stocks.
- Excise Tax
Train imposes higher excise taxes on cigarettes, manufactured oils (petroleum products), mineral products
and automobiles.
- Cigarettes
- Manufactured oils and other products
- Mineral products
- Automobiles
Hybrid vehicles shall be subject to 50% of the applicable excise tax rates. But purely electric vehicles and
pick-ups shall be exempt from excise tax.
- Documentary Stamp Tax
Unlike the House of Representatives’ version of Train wherein no change was introduced on the rates of
Documentary Stamp Taxes (DST), Train increases the DST on almost all taxable documents.
New taxes
Aside from increase and decrease of certain taxes, Train also introduces new taxes in the form of excise tax
on sweetened beverages and non-essential services.
- Sweetened Beverages
- 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:
- The Income Tax Returns shall not be more than 4 pages
- The Tax Return for final and creditable withholding taxes shall be filed quarterly instead of monthly
- With regard to estate tax, the following measures were adopted to simplify its computation and
payment:
1. 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
2. Notice of death is no longer required
3. CPA certification is now required only if the gross estate is above P5,000,000 (up from P2,000,000)
4. The deadline for filing of estate tax return is now one year from death (before, 6 months from death)
5. 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.
- Beginning January 1, 2023, the filing of VAT Return and payment of tax shall be done quarterly
instead of monthly
- 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.
- 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.

Here’s a breakdown of what this law will mean for ordinary Filipinos:
THE GOOD
 Income Tax
Simply put, income taxpayers who earn approximately P22,000 monthly and below are now exempted from
income tax payment. These employees will be able to receive their salary without any deductions because
of tax.
Aside from that, Presidential Spokesperson Harry Roque said the law also simplified taxes for small
taxpayers, including self-employed professionals, with the payment of a flat tax of 8 percent on gross sales
or receipts instead of income and percentage taxes which are filed once a year.

 Estate, Donors, and Value Added Tax


Train will also lower estate tax. Roque said that “taxpayers would now have to pay a fix rate of 6 percent
for the net estate with the standard deduction of P5 million.”
The presidential spokesperson also added that donors’ taxes is also now at a 6%-fixed rate over and above
P250,000 yearly.
He also said the Train Bill changed the value-added tax (VAT) and made it “fairer” after it revoked 54
special laws that provided nonessential VAT exemptions.

 “Simplified and Fairer” Tax System


Sonny Angara, chair of the Senate ways and committee, said that “next year would mark the beginning of
a new, simplified and fairer income tax system.”
The Train Bill has a target revenue of P120 million. 70 percent of which would go to the Build, Build, Build
program, and other infrastructures, including military infrastructure. The remaining 30 percent will go to
education, health, housing, and other “social services and mitigating measures.”
THE BAD
 Increased prices of products and other services
Due to reduced taxes, the government need to make up for loss of revenue. Because of this, certain good
will have higher taxes. Buyers and consumers should expect higher prices for fuel and gas, electricity,
vehicles, tobacco, and other products and services.
Though income taxes will greatly decrease for almost all employees, they would need to spend more money
on things that they might need.

 Increase in DST and dollar deposit


Aside from increased prices of goods, Roque also said documentary stamp tax (DST), which is a tax levied
on special documents, papers, agreements, etc., increased 50 percent to 100 percent, except for property,
savings and nonlife insurance.
“Foreign currency deposit units increased from 7.5 to 15-percent final tax on interest income. Capital gains
of non-traded stocks increased from 5 to 10-percent to 15-percent final tax on net gains only,” Roque said.