I.

INTRODUCTION

TRAIN Law I

The Philippines has different income tax rates for individuals,

corporations, and partnerships. Knowing the right income tax return that an
individual will pay can make his life better. A taxpayer must pay his/her
taxes properly because it is required that taxes should be paid so that the
government have a budget or fund to make the projects that can help the
people in this country. The failure to pay one’s tax is punishable by law.
Income tax is one of many taxes that should be paid by a taxpayer.
According to the bir.gov.ph, “Income Tax is a tax on a person's
income, emoluments, profits arising from property, practice of profession,
conduct of trade or business or on the pertinent items of gross income
specified in the Tax Code of 1997 (Tax Code), as amended, less the
deductions and/or personal and additional exemptions, if any, authorized
for such types of income, by the Tax Code, as amended, or other special
laws”.
Because the new administration promised that they will implement a
fairer tax reform program, President Duterte has already signed the
Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion
(TRAIN) bill aiming to earn revenues to fund the country’s infrastructure
program. 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. The new TRAIN law revises most of the Tax
reform act of 997.
As a complementary measure TRAIN, Congress introduced Package
1B or the Tax Amnesty Bill. Package 1B includes the lifting of bank secrecy
laws and automatic exchange of information and three types of amnesties
(on estate tax, all unpaid internal revenue taxes with the corresponding
waiver of bank secrecy laws in the availment thereof, and delinquencies).
There are also proposals on other amnesty taxes such as importation taxes
and customs duties.

The TRAIN law will reduce the personal income tax rates of each
individual, while people earning a lower personal income will be free from
tax.

The new TRAIN law will foregone the tax rates from those who have
an annual income, not over P250, 000. While people earning more than
P250, 000 but not over P400, 000 annually will be charged with 20 percent
tax on the excess over P250, 000.

Annual income over P400, 000 but not more than P800, 000 will pay
worth P30, 000 and will be charged about 25 percent of the excess over
P400, 000.

People earning more than P800, 000 but not over P2 million per year
will be charged with P130, 000 plus 30 percent of the excess over P800,
000.

Individuals with over P2 million annual income will pay P490, 000
plus 32 percent of the excess over P2 million.

The yearly income of over P8 million will have a tax of P2, 410, 000
plus 35 percent of the excess over P8 million.

TRAIN Law II

The second package of the Duterte Administration’s Tax Reform for

Acceleration and Inclusion (TRAIN) seeks to lower the corporate income
tax paid by some 95 percent of businesses, while at the same time
retaining and providing new fiscal incentives for deserving recipients that
will contribute to national development and help generate pro-poor
investments and jobs.

To complement the Tax Reform for Acceleration and Inclusion

(TRAIN) law, House Bill 8083, which contains the Duterte administration's
second tax reform package, is now up for plenary debate at the House of
Representatives. It will be known as the Tax Reform for Attracting Better
and High-Quality Opportunities or Trabaho.

Unlike TRAIN which focuses on personal taxes, the Trabaho bill

deals with corporate taxation. Specifically, it aims to reduce the corporate
income tax rate from 30% to 20%.

At the same time, the Trabaho bill intends to broaden the tax base (income
subject to tax) by removing some of the preferential or lower corporate tax
rates under the Tax Code and setting stricter rules on transactions between
related parties (affiliated/sister companies).

Another part of the Trabaho bill that will significantly broaden the tax
base is the rationalization of tax incentives by making them performance-
based, targeted, time-bound, and transparent.

Currently, the list of activities qualified for availment of tax incentives

are scattered in various laws. Under the Trabaho Bill, only those activities
included in the one Strategic Investment Priorities Plan (to be issued once
every 3 years) may be granted tax incentives. There will also be a single
menu of tax incentives (income, customs duty, and value-added tax
incentives) to be contained in the Tax Code itself.
 II. BODY

TRAIN Law I

The first of 5 tax reform packages, the Train law "corrects a

longstanding inequity of the tax system" by reducing the income taxes of
99% of income taxpayers, said Malacañang. With the Train law now
signed, almost all the 7.5 million income taxpayers in the country should
see a reduction in their income tax rates starting next year, according to a
media briefer from the Senate committee on ways and means on the
bicameral committee-approved Train bill.
Income taxpayers with an annual salary of P250,000,or those earning
approximately P22,000 monthly and below, are now exempt from income
tax payment. The law also exempts from tax payment the first P90,000 of
the 13th month pay and other bonuses.

Self-employed professionals will see new income tax rates with the
introduction of an 8% flat tax on gross sales or receipts instead of income
tax and percentage tax to be filed once a year. Some people already know
this, but many are still unaware: under the tax reform, the personal
exemption of P50,000 and additional exemption of P25,000 per
dependent, which were enjoyed by taxpayers in the old tax system, have
now been removed.

In the past, an individual may avail of personal exemption (P50,000)

and additional exemption (maximum of P100,000 if there are four
dependents) to be deducted from the taxable income. Under TRAIN, the
exemption has been simplified and made more straightforward. This simply
means:

● if the taxpayer’s gross income is P250,000 or below, he or she is

automatically exempted from paying the income tax; and
● it doesn’t matter now if the taxpayer has one dependent or four
dependents or no dependent at all
 That means two taxpayers with the same gross income will pay exactly
the same tax due — regardless if one taxpayer has four children (i.e., four
dependents) while the other has none. In addition to the removal of
personal and additional exemptions, the maximum P2,400 premium for
health and hospitalization insurance, which is previously deductible from
taxable income, has also been removed. To make up for the loss of
revenue due to reduced income tax, the law imposes higher taxes on cars,
fuel, tobacco, cosmetic surgery, tobacco, and some sweetened beverages.

Diesel, which is not taxed at present, will be imposed P2.50-per-liter

tax in 2018, P4.50 in 2019, and P6 in 2020. LPG would have be taxed P1
per liter in 2018, P2 in 2019, and P3 in 2020. For gasoline, from the current
tax of P4.35 per liter, it would be imposed a levy of P7 per liter in 2018, P9
in 2019, and P10 in 2020.
The law also applies a 4-tier tax scheme for automobiles:

● 4% for up to P600,000
● 10% for over P600,000 to P1 million
● 20% for over P1 million up to P4 million
● 50% for over P4 million

The fuel taxes will have an effect that will cut across income classes.
And for the poor, this would even be costlier, since their pre-TRAIN levels
of earnings, if any, are not taxed anyway, and hence any change in the tax
rates would not have an effect in their disposable incomes. Thus, any
increase in prices of transportation fares and commodities will certainly hit
the poorer classes of society harder.
Finance Secretary Carlos Dominguez III had said the hike in prices of
automobiles would mainly impact the well-off individuals who could afford
to buy luxury cars.All pick-up trucks and electric vehicles would be
exempted from additional taxes. Hybrid cars would be imposed half the
taxes as non-hybrid vehicles.

The law also imposed a tax of P6 per liter for drinks using sugar and
artificial sweeters and P12 per liter for using high fructose corn syrup. Milk
and instant coffee, drinks consumed by a majority of Filipinos, are
exempted. Tobacco products will also be more expensive as under the
Train law, the sin tax on such products will be increased. Coal will be taxed
P50 for 2018, P100 for 2019, and P150 for 2020.

The Train law imposes a 5% levy on cosmetic surgery purely for

aesthetic purposes. Mining will be taxed double, from 2% excise tax to 4%
excise tax on metallic minerals like copper, gold, and chromite. To cushion
the impact of these higher taxes on the poorest Filipinos, the law provides a
cash transfer mechanism.

Under the law, 10 million of the poorest households will receive cash
transfer of P200 per month in 2018, and P300 per month in 2019 and 2020.
There will be also an increase in the value added tax (VAT) threshold from
P1.9 million to P3 million. This would mean small business with annual
sales of P3 million and below would be exempt from paying VAT, which is
envisioned to encourage growth and job generation. A flat rate of 6% for
estate tax and donor’s tax will also be imposed under the new law. Under
the previous scheme, estate worth P200,000 and above was taxed
between 5% to 20%.

This is precisely why there is a subsidy component to the TRAIN

Law, which is going to be implemented by the Department of Social
Welfare and Development (DSWD) through the unconditional cash transfer
(UCT) program. It is estimated that about 10 million Filipino households
and individuals who belong to the poorest sector of the country will benefit
from this program.

Family homes that are worth up to P10 million, will be exempted from
estate tax, higher than the P1-million tax-exempt value under the current
law. To help heirs settle expenses relating to the passing of the deceased
person, the Train law also increased allowable withdrawals from the
deceased person’s account to any amount, subject to a 6% final
withholding tax. Currently, only withdrawals up to P20,000 is allowed.

New rates for the documentary stamp tax and final tax on currency
deposit units are provided in the Train law. Tax rates for stocks not traded
in the stock exchange as well as the stock transaction tax are increased
under the law. The tax rate on sale of stocks have been increased.
The sale of stocks not traded in the Philippine Stock Exchange (PSE) is
previously taxed 5-10%. This is now increased to 15% under the tax
reform. Meanwhile, sale of stocks that are traded in the PSE will be
taxed 0.6% of the gross trade amount, up from the previous rate of 0.5%.

Under the existing National Internal Revenue Code (NIRC), lotto

winnings and all PCSO prizes are tax-exempt. This has now been changed
by the TRAIN law. Starting this 2018, all PCSO and lotto prizes are taxed
20% if the amount of the prize or winnings is above ten thousand pesos
(P10,000).

Long-term time deposits (TD), or time deposits with duration of 5 years

and 1 day, will continue to be tax-exempt. However, the tax on interest
income of these deposits once pre-terminated has been changed. And from
the current rate of 5-20%, the tax charged on the interest income of long-
term time deposits that are pre-terminated (meaning, withdrawn prior to the
scheduled maturity date) has been increased to a fixed 20%.

Under the existing tax code, the interest income on foreign currency
accounts (e.g., US dollar, Euro, Japanese Yen, Korean won, etc.)
deposited in Philippine banks is 7.5%. The TRAIN law has increased
the foreign currency deposit unit (FCDU)’s interest income tax rate to 15%.

Socioeconomic Planning Secretary Ernesto Pernia said the

implementation of the first package of the Tax Reform for Acceleration and
Inclusion (TRAIN) law “has been very beneficial” for the country. The law
has improved fiscal space for the government to fund the “Build, Build,
Build” program and various social programs, including the conditional cash
transfer (CCT), unconditional cash transfer (UCT), free tuition in state
universities and colleges (SUCs), free irrigation for farmers, and ‘Pantawid
Pasada’ cash grants.

At the end of the month, the DSWD is scheduled to begin handing out
a lump sum of P2,400 to the qualified beneficiaries. For 2018, a total of P24
billion has been earmarked for the implementation of the UCT in the 2018
General Appropriations Act. The funds are now deposited with the Land
Bank of the Philippines.

The first to receive the cash grant are the 1.8 million household
beneficiaries of the Pantawid Pamilyang Pilipino Program (4Ps) with cash
cards who will receive these by tomorrow, January 31. The remaining 2.6
million 4Ps beneficiaries without cash cards will receive theirs at a later.

Also included in the UCT are the three million indigent senior citizens
who are currently also beneficiaries of the DSWD Social Pension Program
which is implemented in partnership with their respective local government
units (LGUs). They will receive their cash grants by the end of March 2018.
The remaining 2.6 million households is chosen from the DSWD
Listahanan, or National Household Targeting System for Poverty Reduction
(NHTS-PR). A validation process is conducted and expected to last for
three months. DSWD plans to finished the process on May so the cash
grants is already distributed to the qualified households last June.

Unlike the 4Ps, which is a conditional cash transfer where the

disbursement of the cash grant is contingent on some conditions, such as
enrolling children in school, the UCT is an outright subsidy given by the
State to the poor to shelter them from the shock of increasing prices
despite unchanging low levels of income which is expected as an effect of
TRAIN.

Outright subsidies are always a double-edged sword. They provide a

stopgap measure for families which are adversely affected, hoping that the
cash grants will compensate for the increases in household expenditures
due to rising prices of commodities.

However, the strategy of giving a lumpsum of P2,400 to a household,

without the rudimentary consciousness to save, could lead to the possibility
that the amount may end up being quickly spent, and hence its effects
would not be felt to be spread out over the entire year. Another concern is
whether the amount is enough to cover the increases in the prices of
goods. The subsidy appears to be also insensitive to household size, which
is in fact a primary factor in determining whether the amount would be
sufficient.
 Some lawmakers have reiterated their call for the suspension of the
TRAIN law amid increasing inflation rate, while others suggested
postponing the collection of additional excise tax under the law.

The country’s inflation rate rose to 5.2 percent in June 2018 due to
faster price increases in major commodities like food, fuel and transport.
Such increases were caused by various factors, including global oil prices,
peso depreciation and rice prices. Despite of that the TRAIN law increased
the take-home pay of 99 percent of income taxpayers. That should help in
coping with the rising prices of goods.

All in all, when you combine TRAIN’s impacts on personal income

taxes, excise taxes, VAT, and inflation, the poor come out as worse-off.
Government knew this at the outset. That is why TRAIN allocates at most
30% of its revenues to palliative measures that can help tide over specific
sectors that TRAIN will hurt. These include:

● Unconditional cash transfers for 10 million poor households

● Fuel vouchers for jeepney franchise holders
● Subsidies for workers in the sugar industry (likely due to the excise
tax on sugar-sweetened beverages)
● Discounts on PUVs, NFA rice, and TESDA training for minimum
wage earners, the unemployed, and the poorest half of the
population.
Government expects that these transfers will more than offset the
impact of higher inflation on the poor. And yet such aid – especially the
unconditional cash transfers – will be insufficient and delayed. Why? First,
the transfers will likely be insufficient because they are fixed by law – P200
per month per poor family in 2018, and P300 per month in 2019 and 2020.

This means, for example, that all poor families will get the same
amount regardless of the number of their children. Official estimates of
TRAIN’s impacts were calculated assuming a family of 5 (that is, 3
children). But Dean Dennis Mapa of the UP School of Statistics
correctly pointed out that the very poor tend to have more children than
that. He also pointed out that the poorest 30% of households might
experience higher inflation rates than the rest of the country owing to the
larger share of their budgets going to food (now affected by TRAIN’s new
excise taxes).

However, one should also bear in mind that aside from the
employment benefits that may result from the infrastructure rush, which
could not even accommodate all 10 million households, there is no
assurance that the aggregate growth of the economy resulting from
infrastructure development will indeed trickle down to the poor.

Direct subsidies can at best provide quick palliatives. The long-term

solution is to invest not only in physical infrastructures, but also in social
infrastructures that could transform the poor from passive recipients of cash
grants, into becoming active and viable economic actors.

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. 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.
 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.

The House of Representatives is open to reviewing the controversial

Tax Reform for Acceleration and Inclusion (TRAIN) law in view of rising
prices of products and services. Quirino Rep. Dakila Cua, who chairs the
committee thinks review is needed because what is involved here is the
health of the economy. He said he was confident that President Duterte’s
economic managers and the Bangko Sentral ng Pilipinas are doing what
they can to stabilize prices. Cua, however, said he would not agree to the
proposed suspension of the law while the House is reviewing it. He pointed
out that those who are seeking the suspension or repeal of the so-called
tax reform law should present “compelling reasons” to convince lawmakers
to support their proposal.

There are two pending TRAIN law-related proposals in the House.

Opposition congressmen are seeking the suspension of the law while it is
being reviewed, while the Makabayan bloc of seven party-list
representatives wants it repealed. Bayan Muna party-list Rep. Carlos
Zarate, the bloc’s de facto leader said that the law is detrimental to majority
of the Filipino people. What is needed now is not just a mere review or
suspension of TRAIN. The situation necessitates its repeal.
He said his group is seeking the repeal of the law’s “anti-poor and
anti-people provisions so as to lessen the burden of consumers, because
they are the ones bearing the brunt of the TRAIN. Zarate said, that They
don’t even feel the supposed 6.8 percent growth of the economy, referring
to the rate of economic expansion in the first quarter reported by
administration officials.

President Duterte’s economic managers have frowned upon

proposals in both the House and the Senate to amend the TRAIN law.
Finance Secretary Carlos Dominguez III has said the suspension or repeal
of the statute would deprive the government of funds for the increased
salaries of soldiers and policemen, and the free education program in state
universities and colleges.
 “We need not wait anymore for even more adverse effects, more
price shocks, affecting especially the poor, before Congress should
decisively act. Hundreds of workers of Coca-Cola were laid off, prices of
petroleum products have been going up,” Zarate said. He said rice, which
is supposed to be value-added tax-exempt, became more expensive by at
least P2 per kilo, while prices of meat products like beef, chicken and pork
rose by P10 to P20 per kilo. He said based on official government data,
inflation or the increase in consumer prices went up to 4.7 percent last
month from 4.3 percent in March and 3.8 percent in February. The actual
rates breached all government projections, he stressed. Zarate, however,
lamented that administration officials like Dominguez continue to insist that
the TRAIN law has minimal impact on consumer prices.

Economic managers have failed to see tax reform law as how

ordinary workers do, a party-list representative. ACT Teachers
Representative Antonio Tinio said, in a forum at the University of the
Philippines Saturday, economic managers look at the Tax Reform Law or
Tax Reform for Acceleration and Inclusion (TRAIN) law in a macro view. He
said that the the disconnect on the part of economic managers' point of
view. They believe the economy is doing well, therefore, TRAIN is
beneficial and should not be changed. That for ordinary citizens, life has
been very difficult due to the rise of fuel prices. Tinio said wage must be
increased to help people keep up with rising costs. he point of view of poor
citizens and ordinary workers is that TRAIN is a burden and wages should
be raised to a decent level.

In the House of Representatives, the Trade Union Congress of the

Philippines (TUCP) filed on Thursday a bill to increase the minimum wage
nationwide by ₱320. The Makabayan Bloc on Monday filed the National
Minimum Wage Bill that aims for equal wage at P750 in all regions. The
Labor Department has ordered its wage boards to speed up the review to
increase the salary of minimum wage workers in several regions amid
rising prices of goods. Senator Grace Poe said amendments to the TRAIN
law would have to be done when Congress tackles the second package of
tax reforms proposed by the Department of Finance (DOF).

The tax reform package is lazy work, opposition lawmaker Rep. Miro
Quimbo (Marikina City, 2nd District) said. The lawmaker said the Finance
Department was penalizing taxpayers through higher fuel prices, but not
doing enough to go after tax evaders. “What people don't realize is that
TRAIN 1 and TRAIN 2 — pardon my word — (is) lazy work. Our problem is
our tax effort, our ability to collect.” He said.

Tax collection efficiency in the country is about 14 percent of the

country's gross domestic product (GDP), the lawmaker said. He said it falls
far behind neighboring countries. In 2016, Vietnam had a tax collection
efficiency rate of 25.1 percent, and Singapore at 24.1 percent. “That means
we're not doing our job. The DOF (Department of Finance) thinks that they
can't collect because the law is lacking. But the truth is the laws they want
to pass only have passive taxes — not (taxes) which you have to look for.”
He added.

The remarks come amid pressure on Congress to pass the second

package of the Tax Reform for Acceleration and Inclusion (TRAIN) Law. It
has been widely criticized amid unforeseen inflation rates, higher prices for
basic goods, and a lack of financial assistance for the poor. Its first
package, implemented this year, lowered personal income tax and raised
excise taxes on fuel, sugary drinks and new cars, among others.

Last March, Senator Richard Gordon previously noted that ₱905

billion was lost from 2012 to 2016 due to smuggling and value-added tax
leakage. The government is also missing out on over ₱300 billion a year
due to tax holidays, Customs duty exemptions, and other incentives.

The second tax reform package is expected to lower corporate

income tax, but critics fear it will withdraw tax incentives from certain
sectors, like health and education. This means that tuition in private
schools and hospital fees could rise. Quimbo believes that corporate
income tax should be lowered, but not at the expense of other sectors.

At the House of Representatives, Speaker Gloria-Macapagal Arroyo

has confirmed the second package of tax reform would be a priority.
Meanwhile, Senate Majority Leader Migz Zubiri said the Senate is open to
passing it. However, other senators are hesitant due to public backlash
from the first package.

The government's unconditional cash transfer program is not enough

to help poor Filipino families cope with the adverse effects of the tax reform
program, an expert said. This, as the poorest 30 percent of the population
suffer the most from the continuous rise in the prices of widely-used goods.

"The effect of inflation on poor households is really high. It's

estimated between 5.5 percent [and] 6 percent this year. Last year it was
3.1 percent, so almost doubled," University of the Philippines-Diliman
School of Statistics Dean Dennis Mapa said during a Senate joint hearing
on the price impact of the TRAIN law. Under the policy, a cash subsidy
worth P200 will be given to at least 10 million monthly as a measure to
mitigate the burden on the poor.

But Mapa said the basis of the computation for the cash aid is
underestimated, since it is based on the assumption that the family size is
five. He said the fertility rate of the poorest 20 percent is five, so the
average poor family's size is seven.

"The assumption of cash transfers using five members is really an

underestimation," he said. "This suggestion is just telling us that we may
have to consider family size as an input in the computation of the cash
transfer."
Mapa said poor households are the most affected by high inflation,
which last month reached 5.7. percent--the highest in the last five years.
"During the first seven months of 2018 the poorest 30 percent of the
population suffered the most from increasing prices of goods particularly
food items like rice. Based on our estimates we have higher inflation for
poorest households," Mapa added. He said households spend 38.34
percent of their budget on food, but for the poorest 30 percent of the
population, food takes up 60.89 percent of their budget.

A provision of the TRAIN law also gives poor households a 10

percent discount when they buy the P32 per kilo rice from the National
Food Authority, Mapa said. With the discount, poor families should paying
around P29 per kilo, but because of a lack of supply from the NFA, they
were forced to buy rice sold at P39 per kilo from January to June, he
added.

The first package of the government's tax reform program burdens

the poorest 17.2 million or three out of four (76 percent) Filipino families
with its oil and other consumption taxes without giving them compensatory
personal income tax cuts, research from the IBON foundation finds. "The
poor and middle class, even those few with gains from personal income tax
cuts, will suffer cuts in their standard of living unlike the rich who will easily
be able to maintain their lifestyles," the group said in a statement.
This contradicts the Department of Finance's claim that the Tax
Reform for Acceleration and Inclusion (TRAIN) is not "anti-poor." The DOF
argued that based on the Family Income and Expenditure Survey (FIES)
2015, the top 10 percent of richest households consume 51 percent of total
fuel consumption in the country, equivalent to the poorest 80 percent
combined. It added that the top 1 percent uses as much oil as the bottom
50 percent of all households in the Philippines.

IBON slammed the argument, calling it "insensitive" to the Filipino

families actual incomes. It reported that the poorest 80 percent the DOF
refers to have monthly incomes from as low as P1,441 to around P29,600,
according to the 2015 FIES. This amounts to 18.1 million families belonging
to the country's poor, and 2.1 million belonging to the lower middle class.

IBON added the "richest 10 percent" will include middle class

familites earning between P44,000 and P100,000, which means they are
part of the group which consumes 51 percent of the total fuel consumption.
"It does not consider how taking away a few pesos from poor and middle
class families through higher taxes is not the same as taking away much
more pesos from very rich families. The high incomes and accumulated
savings of wealthy families are more than enough to offset rising prices," it
said.

The research group added the "TRAIN-driven" inflation affected the

purchasing power of the poorest 90 percent of Filipinos by P1,622 to
P9,250. IBON then said taxation needs to be directed towards the country's
richest. "Hundreds of billions of pesos can be raised by increasing taxes
just on the richest 570,000 or 2.5 (percent) of super-rich Filipino families
without burdening the poor. This will also entail lifting taxes on sensitive
products such as oil, which will genuinely benefit the majority," it explained.

Several lawmakers have looked into the cancellation of some

provisions in the tax reform program, especially those on fuel and oil.
However, President Rodrigo Duterte does not want to stop TRAIN, adding
that it is wrong to blame the uptick in commodity prices on the tax reform
law.
 The Senate committee on science and technology will again look into
the threats hounding the Business Process Outsourcing (BPO) sector, this
time with focus on the effect of the Duterte government’s Tax Reform
Acceleration and Inclusion (TRAIN) law on the industry.

Senator Paolo (Bam) Aquino IV said that apart from threats of

reduced employment opportunities due to Artificial Intelligence (AI), the
BPO industry is likewise, concerned over the implementation of the TRAIN
law on them after President Rodrigo Duterte’s decision to veto a special tax
rate provision for them under the law.

Aquino said there have been reports that the BPO sector may need
to slash their workforce or set aside expansion plans in the Philippines due
to the tax reform program. “The BPO sector is a major source of livelihood
for Filipino families. We cannot afford to give away job security and job
opportunities, especially with the rising prices of goods,” said Aquino, who
chairs the committee.

Aquino said he received information that several BPOs are planning

to relocate, abort expansion, or reduce their workforce due to the effects of
the TRAIN Law. The senator pointed out that when the panel first
conducted the hearing last year, AI emerged as the main threat to our BPO
industry. “Now, we saw the need to include the government tax reform
program as it is also taking a toll on the sector,” he said.

During the TRAIN’s period of amendments, Aquino recalled that he

pushed for the retention of a special tax rate for regional operating
headquarters and regional headquarters (ROHQs/RHQs). But Malacañang
vetoed this provision, much to the dismay of the BPO sector. The lawmaker
pointed out that a veto would lead to an increase in cost of doing business,
and eventually affect the status of some 5,000 workers in the BPO industry.

The veto could, likewise, discourage other BPOs from setting up shop
in the Philippines. On the other hand, Aquino said the Information
Technology and Business Process Association of the Philippines (IBPAP)
mentioned that they are anticipating a decline in demand for low-skilled
jobs in the IT-BPO industry of about 43,000 jobs by 2022.
 But Aquino said the threat by AI can be offset if government agencies
and private companies work together to upgrade skills and abilities of
Filipino workers through training and education. He said that with the
IBPAP report, the government can “meet the anticipated increase in
demand of 388,000 jobs for mid-skilled tasks, and 309,000 jobs for high-
skilled tasks in 2022” if the existing IT-BPO workforce and if fresh college
graduates are “re-skilled and up-skilled.”
The National Internal Revenue Code provided a table of rates that the
estate of a decedent would pay if the value of the net estate met a certain
threshold. To get the value of the net estate, we would subtract the
deductions allowed by law from the gross value of the estate.

For instance, if the net taxable estate’s value was over P10 million, it
would pay the amount of P1,215,000 plus an additional rate of 20 percent
for the excess of P10 million. Thus, if the value of net estate is P11 million,
the estate shall pay P1,215,000. An additional P200,000 shall be imposed,
which is the 20 percent of the excess of P10 million. The total amount
would be P1,415,000. The Tax Reform for Acceleration and Inclusion
(TRAIN) law has simplified the computation of the net estate tax. There is
no longer a table or graduated rates. The estate tax is now fixed at 6
percent of the value of the net estate. So, using the previous example of
P11 million, the estate tax shall be P660,000.

The TRAIN law has simplified deductions, as well. Originally, there

were two categories of deductions: ordinary and special. These two
categories were composed of several other items, most of which required
proof through official receipts and the like. Further, the allowable
deductions were subject to limitations that were cumbersome to derive.
Broadly speaking, the TRAIN law provides for three types of deductions.

There is the standard deduction of P5 million. This amount is an

increase from the original, which was P1 million. The value of the family
home is another deduction, the amount of which is capped at P10 million.
This is another increase. Before the amendment, such deduction was
pegged at P1 million. If the value of the family home exceeds P10 million,
the excess would be subject to estate tax. The final deduction shall be the
debts of the decedent.
 The fact that the P5 million is considered as a standard deduction is a
boon for many Filipinos. Since it is a standard deduction, there is no need
to substantiate the same with receipts—it can be automatically claimed.

An interesting situation arises regarding bank deposits of decedents.

Originally, the heirs could only withdraw up to P20,000 from the deposits.
The TRAIN law has removed that cap, but the amount withdrawn would be
subject to a final withholding tax of 6 percent.

Now, this situation could arise: What if the amount of the net estate
tax due, after deductions, was zero or less than the amount subjected to
final withholding tax? Such a situation would be possible and there may not
be a tax liability in the first place if the gross estate and deductions are
considered. The advanced deduction from the final withholding tax
prejudices the estate of the decedent when it should not. In effect, the
withdrawn amount of deposit is taxable by itself, regardless of the net
estate of the decedent.

There are, however, other peculiarities in this final withholding tax

approach that may be clarified further through the implementing rules and
regulations (IRR). The requirement is to impose a final withholding tax on
the withdrawn amount. Should all withdrawals from a deposit account,
where a decedent is the depositor, a joint or a codepositor, be subject to
the 6-percent final withholding tax? In a joint account, for example, the
surviving depositor may actually be withdrawing his own share from the
joint deposit. Would that still be subject to a final withholding tax? Also,
even in a case where the sole depositor is the decedent, it is possible that
the deposit is considered part of the conjugal assets where the surviving
spouse owns a part of it. The withdrawn amount may pertain to the share of
the surviving spouse. Would that still be subject to a final withholding tax?
While these are not clear in the TRAIN law, perhaps these instances can
be clarified by the IRR, as it may not have been the intention of the law
subject to final withholding tax deposits that are not part of a decedent’s
estate.

President Rodrigo Duterte will suspend the second round of higher

excise tax on fuel under the Tax Reform for Acceleration and Inclusion
(TRAIN) law, in response to soaring inflation. In a statement on Sunday,
October 14, Finance Secretary Carlos Dominguez III said the P2 per liter
increase in excise tax originally set to take effect January 1, 2019, will be
put on hold.

The increase would have brought the total excise tax on gasoline
from P7 to P9 per liter, and on diesel from P2.50 to P4.50 per liter.

"After consulting the leadership of both the Senate and the House of
Representatives, as well as the economic team, the President is confident
that this course of action will help anchor inflation expectations for the
coming year, allow the public to manage their finances better, and disallow
hoarders and profiteers from taking advantage of the situation," said
Dominguez.

Opposition lawmakers both in the Senate and in the House of

Representatives earlier filed separate resolutions calling for the suspension
of the fuel tax hike. Under the TRAIN law, excise tax on fuel would be
increased from 2018 to 2020. But the law allows the suspension of the hike
if the average price of Dubai crude exceeds $80 per barrel – something
which has already happened.

"Today's price and multiple estimates of crude prices over the next
two months show that the average price will stay above the $80 threshold,
and it is therefore being announced early that the suspension mechanism
will be activated," Dominguez said.

Since the implementation of the TRAIN law on January 1, 2018,

gasoline prices have increased by as much as P10.50 per liter, diesel
prices by P12, and kerosene by P14.12. Aside from the suspension of the
fuel excise tax hike, opposition senators also want a levy rollback to rates
as of December 31, 2017.

“This is a victory for the minority bloc and would help in our push for
the joint minority resolution seeking to remove the fuel excise tax under the
TRAIN law. We are optimistic that the entire Senate will support this.” said
Senate Minority Leader Franklin Drilon and his fellow opposition senators
Francis Pangilinan, Antonio Trillanes IV, Leila de Lima, and Risa
Hontiveros, in a joint statement.
 Senate Majority Leader Juan Miguel Zubiri on Sunday sent to
reporters an October 9 letter from majority senators, addressed to Duterte.
They sought the President's support for the suspension of fuel excise tax
hikes for 2019 and 2020.

"We earnestly believe that such suspension of oil excise tax

increases would greatly help lift the heavy burden [Filipinos] carry because
of high basic commodity prices," the majority senators said in their letter.

The Philippines' inflation rate had jumped to 6.7% in September, the

highest in more than 9 years, or since February 2009 when inflation was at
7.2%.

"The prices of basic goods have gone up and the government

recognizes that those who have been affected the most are poor Filipino
families who likewise need the most help," Dominguez said. These families,
said minority lawmakers from the House, need more immediate relief.

"While a suspension of the scheduled increases in 2019 will at the

very least help to stem the tide and prevent the situation from getting any
worse, it does nothing to relieve those who are now suffering from the
relentless increase in prices," said the People's Minority, led by Marikina
2nd District Representative Miro Quimbo. The Quimbo-led minority bloc
said that "the anti-poor imposition of excise tax on kerosene and diesel"
must be repealed.

The World Bank previously warned that surging prices of basic goods
could slow down efforts to reduce poverty in the Philippines.

A Pulse Asia survey conducted last September showed that 51% of

Filipinos disapprove of how the Duterte administration is handling inflation.
In a bid to ease inflation, Duterte earlier issued Administrative Order (AO)
No. 13, removing non-tariff barriers in the importation of agricultural
products.

In AO No. 13, Duterte said non-tariff barriers "unduly add to the costs
of importation and limit supply, which in turn push up the prices of
agricultural commodities to the detriment of Filipino consumers, especially
the poor."
TRAIN Law II

Currently, the corporate income tax rate is 30%. Under the Trabaho
bill, the rate will gradually be reduced by 2% every two years starting 2021
until 2029, when the rate will only be 20%.

To compensate the projected revenue loss resulting from lowering of

corporate income tax rate, the Trabaho bill seeks to broaden the tax base
by amending several provisions of the Tax Code.

15% gross income tax option

At present, the Tax Code gives a corporation the option to be taxed at

15% based on gross income. Under the Trabaho bill, this will no longer be
available starting 2019.

10% tax on proprietary educational institutions and hospitals

Proprietary educational institutions and hospitals which are nonprofit

enjoy a preferential income tax rate of 10%. Under the Trabaho bill, the
availment of this preferential rate will be subject to compliance with
established performance criteria to be determined by the Commission on
Higher Education (CHED), the Department of Education (DepEd), and the
Department of Health (DOH). Otherwise, they may be subjected to higher
income tax rate at 15% or 20%.

10% tax on regional operating headquarters of multinational companies

Two years after the effectivity of the proposed Trabaho law, the 10%
preferential tax on regional operating headquarters (ROHQ) will no longer
be available.
Accelerated depreciation for private educational institutions

Normally, capital expenses are not deductible outright in one taxable

year. Instead, they are deductible gradually by way of yearly allowance for
depreciation. However, when a private educational institution incurs a
capital expense for expansion of school facilities, it has the option to deduct
the capital expense outright.

Under the Trabaho bill, educational institutions can avail of the

outright expense option only if they have met the criteria set by CHED,
DepEd, and DOH.

Optional standard deduction

In income taxation, it is a basic rule that a deduction or expense must

be supported with adequate records. However, when a taxpayer chooses
optional standard deduction (OSD) over itemized deduction, the
requirement of substantiation becomes irrelevant.

At present, the OSD rate for individual and corporate taxpayers is the
same at 40%, but the bases are different. For individuals, the OSD is
applied on the gross sales or receipts (before deduction of cost of
sales/services). On the other hand, for corporations, OSD is applied on
gross income (after deduction of cost of sales/services).

Under the Trabaho bill, the 40% OSD rate and base will be uniform
for individual and corporate taxpayers at 40% of gross income. However,
for corporations, availment of OSD will be limited to those classified as
micro, small, and medium-sized enterprises as determined by the
Department of Trade and Industry.

Related party transactions

 When a transaction is between or among related parties
(affiliated/sister companies), businesses have a tendency to arrange the
transactions in such a way that their overall after-tax income is maximized.
Thus, related-party transactions are sometimes done not at arm's length.

To address this gap, the current Tax Code empowers the BIR
Commissioner to distribute, apportion, or allocate gross income or
deductions between or among related parties if the Commissioner finds
that such distribution, apportionment, or allocation is necessary to prevent
evasion of taxes or clearly to reflect the income of the taxpayer concerned.

Under Trabaho bill, the Commissioner will have an enhanced power

to distribute, apportion, or allocate gross income or deductions, as he can
exercise it not only to prevent evasion of taxes but also to prevent
avoidance of taxes.

Moreover, if the transaction or arrangement between or among

related parties has the purpose or effect of tax avoidance, the
Commissioner may disregard and consider such transaction as void for
income tax purposes.

Another major purpose of Trabaho bill is to rationalize tax incentives.

Under the bill, only those projects listed in the Strategic Investments Priority
Plan (SIPP) may be registered and given incentives.

Strategic Investments Priority Plan

Every 3 years, the BOI will formulate a SIPP for approval of the
President. In crafting the SIPP, the BOI shall consider, among others, the
following:

1. substantial amount of investments:

2. considerable generation of employment:

3. adoption of inclusive business activities and value-added

production by MSMEs;

4. use of modern or new technology;

 5. adoption of adequate environmental protection systems;

6. addressing missing gaps in the supply/value chain or moving up

the value chain or product ladder;

7. promotion of market competitiveness

Single incentive menu

At present, the incentives given to investors depend on the law

creating the Investment Promotion Agency (like PEZA, BOI, etc) granting
the incentives. In the Trabaho bill, there will be one single incentive menu
for income, customs duty and VAT incentives.

Income tax incentives

1. Income Tax Holiday (ITH) – The ITH shall be granted for a period
not exceeding 3 years: provided, that after the expiration of the ITH,
the other income tax incentives may be applied for a period not
exceeding 5 years, which includes the period of ITH availment.

2. Other income tax incentives include:

a. reduced corporate income tax of 18%;

b. depreciation allowance for qualified capital expenditure;

c. up to 50% additional deduction on the increment of direct labor

expense;

d. up to 100% additional deduction on research and development

expenses;

e. up to 100% additional deduction on training expenses;

f. up to 100% deduction on infrastructure development;

 g. deduction for reinvestment allowance to manufacturing
industry;

h. enhanced net operating loss carry over (NOLCO) wherein the

NOLCO during the first 3 years may be carried over within the
next 5 years following the year of such loss

Customs duty incentives

Exemption from customs duty on importation of capital equipment

and raw materials directly and exclusively used in the registered activity for
a period not exceeding 5 years.

VAT incentives

Registered export enterprise whose export sales meet the 90%

threshold and are located within an ecozone, freeport, or those utilizing
customs bonded manufacturing warehouse may be given VAT zero-rating
on export sales, or on importation or domestic purchases of capital
equipment and raw materials used in the manufacture and processing of
products.

With the rationalization of tax incentives, it is important to ask: What

will happen to incentives granted prior to effectivity of the proposed
Trabaho law?

The existing registered activities granted the ITH shall be allowed to

continue availing the same for its remaining ITH period or for a period of 5
years only, whichever comes first. If other tax incentives are granted to
existing registered activities, such as the 5% tax on gross income earned
(5% GIE), they shall be allowed to continue enjoying the 5% GIE, as
follows:

1. Two years for activities enjoying the tax incentive for more than 10
years;
 2. Three years for activities enjoying the tax incentive between 5 and
10 years; and

3. Five years for activities enjoying the tax incentive below 5 years.

According to the Trabaho bill, this is applicable "provided that the 5%

GIE shall commence after the ITH period has lapsed [but] only for the
remaining years within the five-year period."

While it has recently found some support in the Senate, some

senators have earlier expressed hesitations against the said tax reform
package. Meanwhile, the House Committee on Ways and Means already
filed a substitute bill named TRABAHO (Tax Reform for Attracting Better
and High-Quality Opportunities), consolidating the many TRAIN 2 bills for
review in the lower house.
Among the many bills consolidated by the substitute bill are House
Bill No. 7214 (Suansing and Suansing) and House Bill No. 7458 (Cua, Abu,
and Gonzales)—two of the major TRAIN 2 bills.

One of the main features of the upcoming tax reform package is the
lowering of the corporate income tax (CIT). Despite other contentious
portions of Package 2, it is generally seen as a welcome development.

In Southeast Asia, the Philippines currently has the highest CIT rate
at 30 percent. TRAIN 2 seeks to lower that, with the two main bills (HB
7214 and HB 7458) proposing different ways to lower the tax rate.

In House Bill No. 7214, the CIT will be lowered by one percentage
point for every reduction in incentive expenses amounting to 0.15
percentage point of the GDP two years prior to the passage of the bill.
Simply put, if the bill were to be passed in 2018, for every reduction in
incentive expenses equivalent to 0.15 percentage point of the 2016 GDP,
there shall be a one percentage point deduction to the CIT. Under this bill,
the CIT can only go as low as 25 percent.

Under House Bill No. 7458, the CIT will be unconditionally reduced by
one percentage point yearly. Under this bill, the CIT can go as low as 20
percent.
 As a revenue-neutral proposal, this lowering of income tax will be
offset by modifications of other revenue sources, such as the removal of
certain fiscal incentives of several industries.

Several tax rates will also be increased such as the interest income of
resident foreign corporations, capital gains tax and tax on intercorporate
dividends of nonresident foreign corporations. Optional standard
deductions have been lowered from 40 percent of gross income to 20
percent. The allowable deductions for interest expense will also be lowered
proportionally to the lowering of CIT.

However, all these offsetting measures are minor ones. The main
offsetting measure, which has been heavily criticized by the Philippine
Economic Zone Authority (PEZA) and recently by the Board of Investments
(BOI), is the incentive reform. In fact, HB 7214 already directly proposes
that in order to lower the CIT, there must be a certain percentage reduction
in incentive expenses.

According to a statement by the Department of Finance, almost

90,000 small and medium enterprises (SMEs) still pay the regular income
tax while there are as many as 645 firms that continue to receive tax
incentives for at least 15 years. These small and medium enterprises that
do not benefit from incentives in the first place stand to gain the most.

Based on the latest data from the Philippine Statistics Authority

(PSA), in 2016, micro, small and medium enterprises (MSMEs) comprise
99.57 percent of all businesses in the country. Of this percentage, 9.5
percent are small enterprises and 0.44 percent are medium enterprises.
These two sectors stand to gain the most from the bill.

Small and medium enterprises contributed 25.70 percent and 7.16

percent respectively to total employment in the country. Combined, SMEs
contribute 32.86 percent to national employment, just behind the 36.72
percent contribution of large businesses.

Notably unaffected are the micro enterprises which comprise the

89.64 percent of all businesses in the country. Under the Magna Carta of
MSMEs (RA 9501), micro enterprises are defined as having assets
amounting to Php3 million or less. This is also the threshold for the
Barangay Micro Business Enterprise (BMBE) classification, which already
receive income tax exemption under the BMBE Act of 2002.

Still, there will be plenty of businesses that would benefit from the
lowered CIT.

The entire Comprehensive Tax Reform Program appears to be

encouraging investments from within the country by empowering SMEs.
The TRAIN Law started the trend by providing better tax rates for Self-
Employed and Professionals and increasing the VAT threshold, while
TRAIN Package 2, or TRABAHO as it is now called, follows suit by
providing those small businesses registered as corporations to avail of
lower tax rates.

These changes present opportunities for executives to take

advantage of. Businesses need to reassess their current tax plan and see if
it still remains the most optimal path to pursue. Just as there are many
pitfalls to the tax reform package, there could be many opportunities that
business owners might miss if they do not have proper guidance.

THE House of Representatives (HOR) approved on third and final

reading on Monday House Bill 8083, or the Tax Reform for Attracting Better
and High-quality Opportunities or “Trabaho” bill.

At least 187 House members voted in favor of the second tranche of

the Duterte administration’s tax- reform series, while 14 other
representatives voted against the bill. Three congressmen, meanwhile,
chose to abstain from the vote.

The three who abstained from the vote are Teddy Brawner Baguilat
Jr. of the Lone District of Ifugao; Arnolfo A. Teves Jr. of the Third District of
Negros Oriental; and Manuel F. Zubiri of the Third District of Bukidnon.

Of the 14 who voted against the bill, nine representatives explained

their votes: Gabriel H. Bordado Jr. of the Third District of Camarines Norte;
Arlene D. Brosas of Gabriela Party-list; Ariel B. Casilao of Anakpawis
Party-list; France L. Castro of ACT Teachers Party-list; and Sarah Jane I.
Ilago of Kabataan Party-list. The objectors also included Edcel C. Lagman
of the First District of Albay; Romero Quimbo of the Second District of
Marikina City; Tom S. Villarin of Akbayan party-list; and Carlos Isagani T.
Zarate of Bayan Muna party-list.

The approved 102-page bill contained changes based on 80

individual amendments made after the HOR’s second reading of the bill.

The new version of the bill provided that, for registered enterprises
within the premises of economic zones and free ports, tax remittances will
be 15 percent between 2019 and 2020; 14 percent in 2021 and 2022; 13
percent in 2023 and 2024; 12 percent in 2025 and 2026; 11 percent in
2027 and 2028; and 10 percent in 2029 and thereafter.

This is accompanied by tax remittances worth 1.5 percent to the

treasurer’s office of the province where the enterprise is, in lieu of the local
business tax; and 1.5 percent to the treasurer’s office of the municipality or
component city where the enterprise is, in lieu of business taxes.

If a business is in a highly urbanized city or independent component

city, this 3-percent share of the LGU shall be directly remitted to the
Treasurer’s office of the HUC or ICC.

The new version also provided that firms whose export sales are
below the 90-percent threshold and are located within an economic zone
will be allowed to avail themselves of value-added tax exemptions on
importation and VAT zero-rating on domestic purchases of capital
equipment and raw materials, provided they comply with electronic receipts
or invoicing prescribed in the bill.

The Investment Promotions Agency (IPAs) are also required to pass

to the Fiscal Incentives Review Board (FIRB) the list of registered
enterprises annually, including firm-level data of provisions of the Tax
Incentives Management and Transparency Act (Timta) law; the approved
amount of investments and employment generation as well as other
benefits annually from a firm-level basis; and approved amount of income
and non-income tax incentives annually.
 The bill also provides that for projects or activities that pose risks to
the environment, health, and economic stability, and those that encounter
“deadlocks” in the IPA Board, the FIRB will formulate policies on tax
incentives; review their compliance with policies; approve their incentives
on the basis of these instances; and suspend or cancel tax incentives
granted to these firms.

These amendments also included the removal of the provision

mandating nonprofit educational and medical institutions to pay a 10-
percent income tax, as well as the conditions of their exemptions.

The list of amendments also include the taxes, such as a 2-percent

tax on gross receipts, imposed on franchises owned by radio and/or
television broadcasting companies whose annual gross receipts of the
preceding year do not exceed P10 million.

There were also a number of changes included in the section of tax

incentives, such as specifications on terms of imprisonment on violations of
economic sabotage; inclusion of the Strategic Investment Priority Plan
(SIPP) in the governing provision for IPAs; and the inclusion of outsourced
services used to produce final export goods in the export sales of goods.

In terms of the reduction of corporate-income tax for projects and

activities under the SIPP, the rate of corporate-income tax will be reduced
to 17 percent beginning January 1, 2021; 16 percent by January 1, 2023;
15 percent by January 1, 2025; 14 percent by January 1, 2027; and 13
percent by January 1, 2029.

The second package is about rationalizing our system of granting

investment incentives. Apparently, because of the penchant of Congress to
grant some incentive or another to supposedly promote investments, there
are now 123 special laws on investment tax incentives. In 2015,
government lost P301 billion due to various forms of tax incentives.

The rational thing to do, as proposed by Finance Secretary Carlos

Dominguez is to repeal all those laws and consolidate them into a single
omnibus incentives law. Among many reform measures, DOF wants to stop
double registration for incentives.

Additionally, only new investment or activities shall be granted tax

incentives. Expansions are signs of profitability, the DOF presentation
observed, and need not be given incentives. Expansions can avail only of
exemption from customs duty of capital equipment.

The definition of what constitutes an exporter was also tightened.

Only those with 90 percent of sales actually shipped out to a foreign
country will be considered an exporter entitled to benefits.

Some businesses aired their concerns over the proposed package 2

of the Tax Reform Acceleration and Inclusion or TRAIN Law.

During the House Committee on Ways and Means’ second hearing

on the proposed measure, the Philippine Association of Multinational
Companies Regional Headquarters Inc. (PAMURI) warned legislators that
thousands of employees in the Regional Operating Headquarters (ROHQ)
sector will be displaced because of the proposal.

PAMURI also said that the removal of incentives would scare away
potential foreign investors. The association warned that some companies
would migrate their operations to India, Malaysia, Vietnam and Hong Kong.

The group previously slammed the first tranche of the tax reform law,
particularly the removal of the 15% preferential tax rate for workers of the
Business Process Outsourcing sector.

The Department of Finance (DOF) proposed in package 2 to

gradually cut corporate income tax to 25% from 30, subject to a
streamlining of tax holidays. The agency also proposed to modify
incentives for companies to make these performance-based, targeted,
time-bound and transparent. TRAIN 2 also called for the repeal of at least
30 laws that grant incentives to investors. Meanwhile, the Philippine
Economic Zone Authority (PEZA) reported that the total investments in
PEZA enterprises stood at a strong P1.99 trillion as of 2015, 78% of which
are foreign capital.
 TRABAHO seeks to make the corporate tax system simpler, fairer,
and more transparent. It will lower the corporate income tax (CIT) rate from
30% to 25% for a large majority of businesses and modernize fiscal
incentives, so that these are given to investors who make positive
contributions to society. This will correct some of the most glaring inequities
and inefficiencies in our corporate tax system.
The Department of Finance (DOF) said the purchase and importation
of books will remain tax-exempt under the second tax reform package. The
agency assured the public that the tax-exempt status of books will remain.
The House of Representatives earlier this month approved on third
and final reading House Bill 8083 or the Tax Reform for Attracting Better
and High-quality Opportunities (TRABAHO) Bill.

The bill will reduce the corporate income tax (CIT) rate from the
current 30 percent to 20 percent in the next 11 years. It also seeks to
modernize fiscal incentives to investors, as well as level the playing field for
micro, small, and medium enterprises (MSMEs).

In the statement, Finance Secretary Karl Kendrick Chua said the

TRABAHO bill will not result in higher taxes on books. "First, under the tax
code, the exemption of the purchase of books, we did not touch that. If you
buy a book from a bookstore, it will still be VAT-exempt," Chua said.
"Second, the importation exemption under the Customs Modernization and
Tariff Act, we also did not touch that."

Chua mentioned that the only provision pertaining to the book

industry under TRABAHO bill involves the repeal of the tax provision under
Republic Act 8047 or the "Book Publishing Industry Development Act." He
added the book industry may be included in the government's Strategic
Investment Priority Plan, where it may enjoy more tax incentives.

Despite its new moniker, the TRABAHO Bill retains the essential
features of the TRAIN 2 package, by primarily cutting down on the
country’s high corporate income taxes and streamlining existing incentives
being granted to corporations.
 The measure consolidated several House Bills on TRAIN, including
House Bills 7214 and 7458, which propose different methods of cutting
down on corporate income tax rates. House Bill 7214 will cut down
corporate income tax rates depending on the annual reduction in incentive
expenses in relation to the country’s GDP, under which scheme the
corporate income tax can be reduced to as low as 25%. On the other hand,
House Bill 7458 will unconditionally decrease corporate income tax by 1%
every year, with the end goal of reducing the same to a fixed rate of 20%
by 2029. It remains to be seen which of these methods will be approved,
but the general consensus appears to be that a reduction in corporate
income tax in the following years is necessary.

While the Department of Finance (DoF) generally views the measure

as a revenue-neutral proposal, it still intends to offset any perceived losses
through the rationalization of existing tax incentives. According to the said
agency, the government suffered an estimated loss of potential revenue
amounting to P178 billion in the year 2016 alone, due to redundant tax
incentives. With the TRABAHO Bill, the agency hopes to limit and realign
these incentives to strategically benefit small and medium enterprises and,
in turn, generate more job opportunities through said enterprises.

The DoF lays down the premise that of the 915,000 firms registered
in 2015, only 2,844 firms were able to avail themselves of tax incentives
worth P301 billion. Juxtaposed with the fact that firms with no incentives
pay 30% regular corporate income tax, while firms with incentives pay 6%
to 13%, and the inequity becomes even more apparent. Thus, by reducing
corporate income taxes, these small and medium enterprises, which
comprise 32.86% of the national employment rate, stand to benefit the
most.

It is worth noting, however, that there have been concerns regarding

the TRABAHO Bill’s impact on foreign direct investments. According to the
Philippine Ecozones Association, the bill may help boost the domestic
market, but at the expense of export-oriented firms which enjoy existing tax
incentives. In fact, due to the uncertainty of these existing incentives,
registered investment pledges under the Philippine Economic Zone
Authority have plunged to P53.067 billion in the first half of this year, which
is more than a 50% reduction from last year’s P120.220 billion during the
same period.
 Some people think that the politicians are just being careful in
passing the TRAIN 2 reform package because they do not want to be
blamed for any negative effects the TRAIN 2 will have especially because
2019 is election year. But for us which are supposed to be impartial, an
objective evaluation should be in placed to really know whether the TRAIN
will have a positive impact in the economy or not. It maybe unfair to blame
everything that has a negative effect to the economy to the TRAIN Law
such as the rise in the inflation rate. The peso depreciation due to a
stronger U.S. economy and the rise in global oil prices are also factors
which could cause the rise in inflation rate.
In fact, according to the statistics of the Department of Finance only
2% point is attributable to TRAIN for the 46% year-on-year 1st quarter rise
in tobacco prices, sin tax for 4% point and 40% point to the rest due to
more efficient sin tax collection Petroleum price increase of 34% year-on-
year in 1st quarter of of 2018, only 7% points is attributable to TRAIN and
27% caused by the rise in global prices and peso depreciation. Still, we
cannot blame the public and certain government officials who directly
attributed to the TRAIN LAW for the rising prices
Furthermore, the subsidies given to the poor and the public transport
drivers is still something to look carefully into – a proper system should be
in place to account properly that these all were given to the right
beneficiaries
Now comes, the TRAIN law 2 in which two of the focal points will be
the reduction of corporate tax from 30% to 25% and the rationalization of
fiscal incentives. The reduction of corporate tax is a welcome feature
especially for the small and medium enterprises (SMEs) since it will likely
lower prices of goods with suppliers having to pay less taxes on their
revenues. However, the rationalization of fiscal incentives should be more
studied particularly its impact on the economy.
One of the reasons why foreign companies set up their offices here is
because of the fiscal incentives. Rationalization itself is not wrong for from
what I understand its true meaning and aim, is to establish a system for
incentives that can be easily managed and monitored to avoid revenue
losses due to the varied unharmonized incentive laws. But there will be
incentives that will be reduced or redefined consequently causing a
negative effect on certain investors and their operations. And one downside
effect on the economy will be the loss of jobs and the pull-out from the
country of some of these investors. I hope our government will take careful
steps in implementing this
Economy is at a decelerated phase in a 2nd quarter report of
Philippine Economic Outlook with annualized GDP growth at a 3 year low
of just 6% although growth remains to be robust due to continue fiscal
stimulus measures significantly brought about by public infrastructure push
which has a positive effect on the services and construction sectors. With
2018 about to close and train 2 law looming ahead in 2019, government
should take careful steps that new tax reform packages to be implemented
will do more good than harm to the economy.
Meanwhile, in the aspect of employment, this might help the country
create more jobs. That is if the said bill will be able to follow through its
measures efficiently. Supporters of the bill said the new name better
reflects its objectives this tax reform package. Its goal is to create jobs by
attracting the right set of investments through incentives, according to one
of its proponent during a panel hearing. While TRABAHO will cut tax
incentives, it will, however, grant them to businesses that will bring more
jobs and provide a better contribution to the economy in the long run.

“The proposal to lower corporate income tax rates is unlikely to result

in a tangible boost to investment without an improvement to the business
environment,” Fitch Solutions Macro Research said in a September 20
report.

On a positive note, it said the bill’s impact on revenue collections

would likely be “negligible” in the short term, with effects further down the
road to be addressed by other pending CTRP packages.

“We are therefore maintaining our forecast for the Philippines’ budget
deficit as a share of GDP to come in at 2.9 percent in 2018 and average
2.6 percent from 2019-2027,” Fitch Solutions added.

It cited the World Economic Forum’s 2017-2018 Global

Competitiveness report as stating that “inefficient government
bureaucracy,” “inadequate supply of infrastructure” and “corruption” as the
top three concerns with regard to doing business in the Philippines.

Tax rates, in comparison, only rank fifth. The government has said the
CIT cuts will make the country’s rates at par with Asian neighbors, but Fitch
Solutions said the reductions, to take effect starting 2021, will be “so
gradual that it will take until at least 2025 before they fall in line with
regional levels.”

In particular, it said the Philippines would only catch up to Indonesia

and Malaysia after 2025. Under the Trabaho bill, the current 30 percent CIT
will be cut by 2 percentage points every two years until it hits 20 percent in
2029. While CIT accounts for almost one-fourth of government revenues,
the expected P62-billion loss in 2021 will represent just 1.5 percent of
government revenues that year.

As the measure will also limit available tax incentives, this could
offset some of the revenue loss. Succeeding CTRP packages that contain
revenue-enhancing measures, including higher taxes on “sin” products,
property taxation reforms and a bigger government share of mining
revenues, are expected to make up for the CIT losses.

Non-profit private schools and hospitals that perform well and adhere
to high standards of service will continue to enjoy the current low income
tax rate of 10 percent under the proposed corporate income tax (CIT)
reform bill pending in the House of Representatives, the Department of
Finance (DOF) said.

Finance Undersecretary Karl Kendrick Chua said the bill, dubbed the
“Tax Reform for Attracting Better and High-quality Opportunities
(TRABAHO) Act, would “incentivize” private hospitals and educational
institutions to upgrade their quality of service in order to be granted this
special tax rate, as he sought to correct misapprehensions about the
measure supposedly resulting in higher tuition payments.

The bill does not cover religious schools, which under the
Constitution, are exempted from paying income tax provided that they are
organized as non-stock non-profit corporations and no part of their net
income shall belong or benefit any member, organizer, officer or person.

Chua said the TRABAHO bill aims to ensure that students are able to go to
schools that provide quality education, through a set of performance criteria
to be determined and evaluated by the Commission on Higher Education
(CHED) and the Department of Education (DepEd). The Department of
Health (DOH), meanwhile, will establish the criteria for private hospitals to
assess their performance and their eligibility for the tax incentive, he said.

Chua said the absence of a system to evaluate educational

institutions and encourage them to improve their performance has made
some of them “very profitable,” citing as an example a school with a gross
revenue of P1.4 billion in 2015 and a net income of P624 million. This
means that under 10 percent tax regime, the school paid taxes of only P61
million even though it did not meet any of the performance criteria set by
CHED, and was able to pay dividends of P250 million, Chua added.

Finance Secretary Carlos Dominguez III pointed out that this example
shows that “half of the dividends were actually paid for by the public” or the
country’s taxpayers. “Now, if they don’t meet [the criteria] why should we
subsidize [schools which] don’t meet the criteria,” Dominguez said.
“Basically, we are supporting this school even though it is not helping the
students.”

“Schools and hospitals that are up to standard need not worry. We

need to make sure that our children study in good schools and that we go
to hospitals that provide quality medical care,” Chua said.

Chua said the TRABAHO bill provides for a transition period for
schools and hospitals to improve the quality of service they render, before
the subpar institutions are taxed a higher rate.

“Under the TRABAHO bill, wala pong magbabago kung ang

performance ng paaralan ay maganda. Halimbawa, ano yung magandang
performance? Una, sila ay may at least Level 1 accreditation. Isipin mo na
lang yung pinakamataas, tulad ng UP, Ateneo, La Salle—Level 4. Eight
percent lamang ng mga schools ang may atleastLevel 1, so majority wala
man lang accreditation (there would be no change if the performance of the
school is good. For example, what is good performance? First, they have to
reach at least Level 1 accreditation. Let’s cite the ones with the highest like
the University of the Philippines, Ateneo and La Salle, these are Level 4.
Only eight percent of schools are at least Level 1, the majority have no
accreditation at all),” Chua said.
 Data gathered by the DOF from the CHED show that among private
higher educational institutions (HEIs), more than 50 percent of the faculty in
sectarian institutions have graduate degrees, while with private non-
sectarian, non-profit schools only 29 percent have faculty members with
graduate degrees.

Only 102 or 8 percent of non-sectarian HEIs have at least one study

program accredited (at least level 1) with the CHED. Moreover, among
non-sectarian HEIs, the portion of students passing licensure examinations
averaged only 37 percent as of 2016.

Chua said that by evaluating schools through a set of performance

criteria and encouraging them to improve by granting them low income tax
rates, the bill would, in effect, help ongoing efforts to upgrade the quality of
education, especially tertiary learning, in the country.

Among the criteria cited by Chua is the school’s number of passers in

licensure examinations and the number of faculty members with pertinent
qualifications. The TRABAHO bill seeks to amend Section 27 of the
National Internal Revenue Code by providing among others, a 10 percent
income tax rate on “proprietary educational institutions and hospitals which
are non-profit,” provided that “they comply with established performance
criteria to be determined and evaluated” by the CHED and DepEd, and the
DOH.

“Provided further, that educational institutions and hospitals that fail to

meet the established performance criteria shall pay a tax of ten percent (10
percent) on their taxable income two (2) years after the effectivity of this
Act, fifteen percent (15 percent) in the succeeding three (3) years, and
twenty percent (20 percent) thereafter if the educational institutions and
hospitals fail to meet the established criteria,” the bill also states.

Chua said private schools, through the Coordinating Council of

Private Educational Associations (COCOPEA) have agreed with lawmakers
to this performance evaluation and incentives system, but want State
Universities and Colleges (SUCs) to be likewise covered. “That is what we
are doing also,” Chua said.
 More than 40 lawmakers led by Representatives Dakila Carlo Cua,
Aurelio Gonzales and Raneo Abu have co-authored the TRABAHO bill, the
consolidated version of 12 measures proposing to slash the CIT rate and
modernize the country’s system of providing investment incentives to
private corporations.

Based on data from the Securities and Exchange Commission (SEC),

Chua said that out of around 25,000 private schools. 18,000 are exempted
from paying the income tax because they are non-stock and non-profit,
while about 6,000 pay the current rate of 10 percent.

Chua pointed out that the TRABAHO bill also provides the
earmarking of funds for universal health care and the grant of student
vouchers so that revenues would go directly to helping those in need.

“We prefer to give the assistance directly to the beneficiary through

vouchers for students and universal health coverage for those who need
medical treatment,” Chua said. Dominguez said he was also planning to
discuss with CHED this possibility of directly giving the subsidies to
students to enable them to choose the college or university where they
want to study.

PERSONAL EVALUATION