Despite natural growth in people’s nominal income, gasoline and diesel excise taxes

remain unadjusted at P4.35 and P0.00 since 1997. These unadjusted rates have resulted in about

P140 billion in annual forgone revenues, and made our tax system less progressive by favoring

the richest 10% of Filipino households who consume 50% of fuel in the economy. To correct

this, the DoF proposes an increase of at least P6 per liter.

In TRAIN, the proposed increase is staggered to P3 in 2018, an additional P2 in 2019,

and a final P1 in 2020. By the first year, about P74 billion will be generated to fund

infrastructure, health, education, and social protection measures. Under this proposal,

independent estimates show an increase in annual direct expenditure for gasoline, diesel,

kerosene, LPG, and lubricant expenditures totaling only P76.06 for the poorest decile while

increases in commuting costs will only total P39.8 — both of which will be more than covered

by the proposed cash transfers worth P2,400 annually per qualified household.

In contrast, the UA&P recommends an adjusted schedule of P1.75, P2, and P2 over the

same three-year period. The idea seems attractive, since by the end of three years the results

seem comparable to the original proposal (P6 vs. P5.75). However, this proposal arises from the

UA&P estimate using 2012 data, claiming that TRAIN will increase the fuel expenditure of the

first decile annually by P1,076. This projection is questionable, given that the first decile’s

annual total fuel expenditure does not even reach P500, according to the 2015 Family Income

and Expenditure Survey.

Moreover, the UA&P proposal comes with very crucial caveats.

Chapter 2

8
 Alongside the lowered rate of P1.75 in the first year, the paper proposes that the threshold

for personal income tax (PIT) exemption be lowered to P150,000, rather than the threshold

agreed upon both in the House of Representatives and the Senate, which is at P250,000 year.

They later on assume the feasibility of a cash transfer worth P3,600 — an amount that was only

proposed to match the original DoF proposal of a P6 increase.

The first problem with the watered down fuel excise is that it isn’t viable without drastic

adjustments to the other aspects of TRAIN. Lawmakers will be hard-pressed to change the PIT

exemption threshold, not to mention that the cash transfers are supposed to come from 40% of

the incremental revenues from the fuel tax. The P1.75 rate is nowhere near enough to fund the

transfers, let alone any new government programs.

Second, as the diluted fuel excise tax increase threatens the implementation of the cash

transfers program, UA&P’s proposal is poised to benefit more the rich (who has guaranteed

gains from income tax cut), than the poor, making TRAIN less progressive.

A SUGAR-FREE TRAIN?

House Bill 5636 also proposes a P10/liter tax on sugar-sweetened beverages (SSBs). By

raising the price on SSBs, the tax aims to reduce excessive sugar intake, which has been linked

to obesity and life-threatening diseases like diabetes. Revenues from the SSB tax will be

earmarked for programs to prevent noncommunicable diseases, feeding programs, support for

potable water, and support for alternative livelihood programs of sugar-producing regions.
Chapter 2

9
 In its analysis, UA&P calculates economy-wide multiplier effects for various interrelated

industries, and shows the bill’s potential adverse impact on beverage sales and subsequently on

direct and indirect employment. It demonstrates an appreciation for wider-scale impacts of the

tax, but they do so unfairly.

First, the UA&P study claims that the gains from SSB revenues, which it estimates at

about P38 billion, will be eroded to only P8 billion due to decreased VAT and CIT revenues

arising from decreased sales. However, they solely account for decreased VAT and CIT from

decreased beverage sales, but completely neglect households’ increased spending (perhaps on

other goods) that will result from the increased disposable income all deciles will receive from

the cash transfers and the PIT relief. This now increases VAT and CIT revenues from other

goods.

Assuming, without conceding, the net P8 billion from SSB tax is correct, there is still

clear concession on the part of UA&P that the government revenues stand to be much bigger

than current estimates already stand.

Note that based on the country’s experience, excise tax is among the most efficient tax to

administer, with 95% of the target collections met on the average. While the UA&P wrongly

presents a tug-of-war among the three, in the lens of equity and revenue generation, introducing

excise tax is a complement to VAT and CIT given the fact that they result in collections

equivalent to only 40 to 50% of their supposed amounts, respectively.

Chapter 2

Second, the UA&P study uses the notion of multiplier effects as an economic strawman,

portending crippling losses to the economy due to impact on industries, but conveniently
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ignoring the potential welfare investments from additional government financing for education,

health, infrastructure, and social protection. Not to mention it will benefit businesses that often

complain of the complexities in the tax system, an issue that tops the list of deterrents to business

growth in the country. In short, the study only pretends to be comprehensive but only to the

extent of shoring up certain interests. Finally, the UA&P study totally forgets the provision’s

health impacts.

As former Secretaries of Health and numerous medical associations have pointed out, the

SSB tax will have direct effects like reduced sugar consumption to curb obesity and reduce top

non-communicable diseases like diabetes, as well as indirect effects like funding nutrition

programs to help the undernourished.

Excessive sugar intake also has economic impacts in terms of health costs, productivity

costs, and plunging vulnerable families into poverty. Alleviating these will have their own

multiplier effects that benefit all, especially the poor and near poor.

As TRAIN enters its last few sessions with the Senate Committee on Ways and Means, it

is important to focus the discussions where they matter most in light of ever-evolving evidence.

For the fuel excise, by keeping the current proposal’s P3 increase in the first year,

lawmakers will be able to keep both the PIT exemption and a cash transfer of P2,400 for the

poorest 50% of households, all while generating substantial revenue for public transportation,

universal health care, and other programs in the pipeline. What matters is whether they will
Chapter 2

receive the promised income tax relief and cash transfer, which will more than offset inflationary

impacts. This is achieved in the P3 case, not the P1.75 case.

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 As for the SSB tax, by considering a big picture that seriously accounts for its health

impacts and complementary measures, a sweet spot may certainly be found. The dichotomy the

UA&P study draws between health and the economy is a specious one: first, because health itself

is a precondition for a growing and equitable economy, and second, because their economic

calculations themselves are incomplete and hence biased.

For a truly progressive tax reform, the evidence on the table must be rigorous,

comprehensive, and up-to-date. More importantly, they must approach the tax reform

objectively, with the people’s welfare in mind. As TRAIN rounds its final stretch, it cannot risk

compromising its key features based on arguments well past their prime; the TRAIN has already

left that station.

https://www.bworldonline.com/critique-uap-studies-tax-reform/?fbclid=IwAR1-
qkFBtmn7nxXmTPpxXVsfzvy2lcaGnK_xFrLInNqWkWnA3AJEFWK-mu8

A recent study conducted by the IBON Foundation concluded on Thursday, October 4,

that the first package of the Tax Reform for Acceleration and Inclusion (TRAIN) law burdens

the poorest 17.2 million Filipinos nationwide.

The said non-stock and non-profit organization found out that 76 percent or three out of

four Filipino families are struggling to bear oil and other consumption taxes without the benefit

of receiving compensatory personal income tax cuts

“The poor and middle class, even those few with gains from personal income tax cuts,
Chapter 2

will suffer cuts in their standard of living unlike the rich who will easily be able to maintain their

lifestyles,” IBON Foundation said as reported by CNN Philippines.

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 This goes against the claim of the Department of Finance (DOF) stating that the tax

reform is not “anti-poor.” The countrys finance department claimed that the top 10 percent of

richest households consume as much fuel as the poorest 80 percent combined which is at about

51 percent.

The DOF added that based on the Family Income and Expenditure Survey (FIES) 2015,

the top 1 percent uses oil equivalent to the bottom 50 percent of all households in the entire

country.

IBON Foundation criticized the logic of the said argument, labeling it as “insensitive” to

the actual income of a Filipino family.

The study reported that the poorest 80 percent has a monthly income ranging from

P1,441 to around P29,600. As such, around 18.1 million families would belong to the country’s

poor. While 2.1 million would belong to the lower middle class.

IBON reported that the “richest 10 percent” would include middle-class families earning

between P44,000 and P100,000, which means they are part of the group which consumes 51

percent of the total fuel consumption.

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. The said foundation then suggested that

taxation should be directed towards the country’s richest.

Chapter 2

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 “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.

In order to lessen the harm that TRAIN law is causing, 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 as he does not believe

that the tax reform law is responsible for the price surges.

https://www.asianjournal.com/philippines/across-the-islands/train-law-burdens-majority-of-
filipino-families-say-study/

Local Journals

Albay Representative Edcel Lagman on Wednesday claimed there has been a "serious

lack of study" regarding the effects of the Tax Reform for Acceleration and Inclusion (TRAIN)

law on the masses, as legislators seek to review the provision on excise tax.

"The fact that there is a lack of serious study on the ill effects of the TRAIN once

implemented on the masses. I think the economic advisers should be able to retrace the footsteps

before it's too late," Lagman said in an interview on ANC's Headstart.

Lagman said the government could wait for a "better time" to increase the excise taxes

instead of distressing the masses.

Chapter 2

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 "It's a question of priorities. You want more taxes and you'll bedevil the masses? Or you

force-protect the masses and wait for a better time to increase the excise taxes? It's a question of

priority which should come first. The people or revenue collection?," he said.

Lagman said the Congress could pass a joint resolution suspending the implementation of

the excise taxes on fuel products, saying it is a "culprit."

"We have already said during the deliberation that this would be oppressive to the masses

because [they] did not benefit from tax relief because in the first place, they were already

exempted from taxes. But they are suffering from the ill effects of the increase in excise taxes of

petroleum products," he said.

On Monday, the Department of Finance (DOF) said the government does not have any

immediate plan to suspend the reformed excise tax rates on petroleum products as it is still

unwarranted under current conditions.

Under the TRAIN, signed into law by President Rodrigo Duterte in December, the prices

per liter of liquefied petroleum gas (LPG) increased by P1, diesel by P2.50, and gasoline by

P2.65 as a result of higher excise tax rates.

The Department of Energy intends to make a recommendation suspending the reformed

excise tax rates on petroleum products if the average price of crude oil would reach $80 per

barrel.

Magdalo party-list representative Gary Alejano has called for an immediate review of the
Chapter 2

TRAIN law in view of rising fuel prices, while Senator Bam Aquino filed a bill restoring his

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earlier proposal to give the government the authority to stop the implementation of TRAIN once

inflation breaches the government target.

https://www.gmanetwork.com/news/money/economy/655149/effects-of-excise-tax-by-train-law-
have-serious-lack-of-study-lawmaker-says/story/

Foreign Journals

PARIS (Reuters) - President Donald Trump's tax reform caused a major disruption in

global investment flows, with the United States bringing more money home than it sent out in

the first quarter for the first time since 2005, an OECD study showed on Friday.

The study from the Paris-based Organisation for Economic Co-operation and

Development is the first to reveal data on the impact of Trump's Tax Cuts and Jobs Act on

foreign direct investment (FDI) flows, the OECD said.

It found that global foreign direct investment outflows tumbled 44 percent to $136 billion

(103.63 billion pounds) in the first quarter of this year, from $242 billion in the previous quarter.

That was largely due to a switch to negative outward investments from the United States -

meaning that American companies brought back more money home than they sent abroad in the

quarter.

"The U.S. normally is the largest outward investor in the world. So when it switches to

negative that has a big impact on the global flows," Maria Borga, a statistician at the OECD's

investment division told Reuters.

Chapter 2

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 The Tax Cuts and Jobs Act passed in December was touted as a way to create more jobs,

drive U.S. economic growth and level the playing field with companies based outside the United

States. It slashed the corporate income tax rate to 21 percent from 35 percent and charges

multinationals a one-time tax on profits held overseas.

Outward investment from the United States fell to $-145 billion, registering negative for

the first time since the fourth quarter of 2005. The change was due to large repatriations of

profits by U.S. parent companies from their foreign affiliates.

"At this point it probably is essentially their financial assets, cash holdings that they're

bringing and it's probably not going to have an immediate impact in terms of employment or

value added at their foreign operations," the OECD's Borga said.

The long-term impact is more difficult to predict but could be significant and long-

lasting, she said.

"We don't really know what's going to happen in the long term. But this has really shifted

a lot of the incentives," Borga said.

"For example the cut in the tax rate might make the U.S. a more attractive destination for

foreign investment, so you might see more foreign investment into the U.S.," she said, adding

that other countries might also be tempted to respond.

With U.S. foreign investment outflows tumbling, Japan became the world's top outward
Chapter 2

investor in the quarter, Borga said.

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https://www.euronews.com/2018/07/27/global-foreign-investment-flows-tumble-on-trumps-tax-
reformoecdsays?fbclid=IwAR0SmqUBwBPtqaFUW5g1uixHwnXcjIxGHZBpvELmakIgURiVB
P3LhVZQgyY

Local Literatures

THE TAX REFORM FOR ACCELERATION AND INCLUSION (TRAIN) ACT.

President Rodrigo Roa Duterte signed into law Republic Act No. 10963, otherwise

known as the Tax Reform for Acceleration and Inclusion (TRAIN) Act, the first package of the

Comprehensive Tax Reform Program (CTRP, on December 19, 2017 in Malacanang.

The TRAIN will provide hefty income tax cuts for majority of Filipino taxpayers while

raising additional funds to help support the government’s accelerated spending on its “Build,

Build, Build” and social services programs.

This tax reform package corrects a longstanding inequity of the tax system by reducing

personal income taxes for 99 percent of taxpayers, thereby giving them the much needed relief

after 20 years of non-adjustment of the tax rates and brackets. This is the biggest Christmas and

New Year gift the government is giving to the people.

For the poorest 10 million households, the government is giving them targeted cash

transfers of PHP 200 per month in 2018 and P300 per month in 2019 and 2020, sourced from

higher consumption taxes that the rich will contribute, as well as better social services,

healthcare, and education. All these will prepare the people for better job opportunities.

In a separate message, President Duterte has vetoed certain provisions of the TRAIN. The
Chapter 2

vetoed five line items are the following provisions:

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 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
Chapter 2

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.

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 With the people’s support and understanding, all these reforms will result in more and

better jobs, lower prices, and a brighter future for every Filipino.

https://www.dof.gov.ph/index.php/ra-10963-train-law-and-veto-message-of-the-president/

The Senate committee on economic affairs will convene today economic experts and

members of academe to look into the effects of rising inflation and to identify the immediate

government actions to mitigate the effects of rising prices on Filipino consumers. In filing the

resolution to call the experts to a hearing, committee chair Sen. Sherwin Gatchalian stressed the

need to look into the macroeconomic fundamentals of the country, particularly those focusing on

the means to contain rising inflation.

“The biggest component of the inflation we are experiencing now involves food prices.

This is a cause for concern because studies show that higher inflation, especially if driven by

rising food prices, is related to higher hunger incidence among the poor and working-class

sectors,” he pointed out.

“We need to identify and implement a strong plan of action to get this inflation under

control and make sure our countrymen have enough food to put on the table for their families,”

Gatchalian added.

Records from both the Bangko Sentral ng Pilipinas (BSP) and the Philippine Statistics

Authority (PSA) revealed a 3.95 percent inflation figure for January 2018, the highest January

inflation rate since 2014 at 4.24 percent. Food and non-alcoholic beverages registered second

among basic goods and commodities, having the biggest inflationary increase for the year at
Chapter 2

4.47%. The public hearing shall also include a discussion on the potential causes of inflation,

such as rising oil prices, heightened consumer demand and a weakening peso.
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 Aside from this, Gatchalian said he will seek updates on the effects of the recently rolled

out Tax Reform for Acceleration and Inclusion (TRAIN) law on the purchasing power of

consumers, as well as the changes in consumer behavior that have already been observed.

Similarly, he will probe the exact operational status of the expanded cash transfer

program that the administration has promised to implement to shield 10 million families from the

inflationary effects of TRAIN.

“Essentially, the aim of this hearing is to get a clear snapshot of the state of the Philippine

economy at this moment, with special focus on gauging the effects of this administration’s

economic reforms on Filipino consumers. This snapshot will be critical to the crafting of

responsive strategies to keep the rising prices of goods and services under control,” the senator

said.

https://www.philstar.com/headlines/2018/02/26/1791438/senate-starts-review-train-effects

Foreign Literatures

President Donald Trump signed the U.S. tax reform bill previously entitled the Tax Cuts

and Jobs Act into law on December 22, 2017, enacting comprehensive U.S. tax reform with most

provisions becoming effective starting on January 1, 2018 (generally until 2025).

The summary below describes, in general terms, the principal effects of the tax reform bill on

foreign taxpayers investing or operating in the United States, including the following:

1. Reduction of the U.S. federal corporate income tax rate from 35 percent to 21 percent
Chapter 2

2
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2. Minimum 10 percent U.S. federal corporate income tax on foreign related-party

payments by certain large U.S. corporations or non-U.S. corporations with U.S. business

income (aka the Base Erosion Anti-Abuse Tax or BEAT)

3. New anti-hybrid rule denying deductions for certain interest and royalties paid or accrued

to foreign related persons

4. Reduction from 39.6 percent to 37 percent of the maximum U.S. federal income tax rate

on ordinary income (including real property income) derived by individuals and persons

such as trusts that are taxed as individuals, directly or through "pass-through" entities

5. Up to 20 percent additional deduction for ordinary income (including real property

income) derived by individuals directly or through "pass-through" entities

6. "Carried Interest" long-term capital gain tax rate not eliminated but requires a more-than

three-year holding period

7. Interest deductions limited to 30 percent of earnings before interest, taxes, depreciation

and amortization (EBITDA) or 30 percent of earnings before interest and taxes (EBIT)

starting in 2022

8. Net operating loss deductions become limited to 80 percent of taxable income

9. Reversal of the recent U.S. Tax Court decision in Grecian Magnesite vs. Commissioner

of Internal Revenue regarding taxation of gain upon a sale by a foreign person of an

interest in a "pass-through" entity that owns a U.S. business

https://www.hklaw.com/publications/main-effects-of-us-tax-reform-on-foreign-taxpayers-01-
02-2018/
Chapter 2

Foreign Studies

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 On December 22, 2017, President Trump signed broad tax reform legislation into law that

will have significant implications to U.S. investments. But what does it really mean for foreign

multinational entities with existing U.S. operations or for those exploring opportunities in the

U.S. market?

1. FEDERAL TAXATION OF U.S. OPERATIONS

Among some of the changes are a reduction of the corporate tax rate to 21 percent,

elimination of net operation loss (“NOL”) carrybacks replaced by a generous indefinite

carryforward period, and a general limitation on NOL deductions of 80 percent of adjusted

taxable income. In addition, the corporate alternative minimum tax, which added much

complexity to the Internal Revenue Code (“IRC”), has been eliminated. The domestic

production activities deduction has been repealed. New rules permitting 100-percent bonus

depreciation and capital expensing provide large benefits for those making domestic capital

investments.

2. STATE TAX CONSEQUENCES

Tax reform creates additional tax complexities for foreign investment in the United States

from a state tax perspective. Not all states follow the IRC in the same manner and how a state

adopts the impending changes will impact a state’s taxable income computation. Some states will

need to pass additional legislation in 2018 if they wish to adopt the federal rules, or conversely,

to prevent the rules from taking effect. C corporations will continue to benefit from the state and

local tax deductions that have been repealed with respect to other taxpayers.
Chapter 2

3. CROSS-BORDER PAYMENTS

Tax reform adds new rules impacting certain corporations that make cross-border

payments to related foreign parties. If certain threshold conditions are satisfied, one such 2
3
measure imposes a Base Erosion and Anti-Abuse Tax (“BEAT”) as a minimum tax on certain

U.S. corporations and foreign corporations with U.S. branches that take U.S. tax deductions

giving rise to “base erosion tax benefits.” In addition, tax reform generally limits certain interest

expense deductions to 30 percent of modified adjustable taxable income, including certain cross

border interest payments.

4. ANTI-HYBRID RULES

Tax reform adds a new rule which may disallow deductions for interest and royalties paid

or accrued to a related party pursuant to a hybrid transaction or by, or to, a hybrid entity in

certain situations. This rule bears some resemblance to the Organization for Economic Co-

operation and Development proposals in BEPS Action 2 applicable to hybrid instruments and

hybrid entities.

5. CONTROLLED FOREIGN CORPORATIONS

Tax reform modifies certain constructive stock attribution rules used to determine

whether a foreign corporation is treated as a controlled foreign corporation (“CFC”) for U.S. tax

purposes. As a result, stock of a foreign corporation owned by a foreign shareholder of a U.S.

corporation may be attributed to a U.S. subsidiary of that foreign shareholder for purposes of

determining whether such a foreign corporation is a CFC and whether the U.S. subsidiary is a

U.S. shareholder in the foreign corporation. This will increase the number of foreign

corporations treated as CFCs. U.S. shareholders of CFCs are generally required to file certain

information returns to report their ownership interests in the CFCs along with certain other

information. The IRS recently provided guidance in Notice 2018-13 on information reporting for
Chapter 2

certain foreign corporations that are CFCs due to the modification in construc tive stock

attribution rules.
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 6. INTANGIBLES

Tax reform provides U.S. corporations with a reduced tax rate on foreign-derived

intangible income (“FDII”). Further, U.S. shareholders of CFCs must now include their portion

of global intangible low-taxed income (“GILTI”) of such CFCs into taxable income. In many

cases, a detailed review of a group’s ownership of intangibles and business model will be

needed. While GILTI and FDII generally target intangible income, given the broad scope of

these provisions, multinational groups should review their structures and supply chains to

determine the implications to these new rules even in situations where they do not otherwise

generate income from intangible property.

7. PARTNERSHIP INTERESTS

The tax reform provisions provide that gain or loss from the sale or exchange of a

partnership interest is effectively connected with a U.S. trade or business to the extent that the

transferor partner (as opposed to the partnership) would have had effectively connected gain or

loss had the partnership sold all of its assets at fair market value as of the date of the sale or

exchange. In addition, the purchaser/transferee is generally required to withhold under new

withholding tax rules that apply in these instances.

https://www.bdo.com/insights/tax/federal-tax/puzzled-by-u-s-tax-
reform?fbclid=IwAR2cgVyoS_uOBZK9ohgtKAEHOyKFjxdGezryEozIkxsK7iUIFbUZyGlH5I
o Chapter 2

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