Republic of the Philippines

BATANGAS STATE UNIVERSITY

COLLEGE OF ACCOUNTANCY BUSINESS ECONOMICS AND
INTERNATIONAL HOSPITALITY MANAGEMENT
CITE Building, Pablo Borbon Main 1, Rizal Avenue, Batangas City
A BRIEF HISTORY OF TAXATION

The first record of organized taxation comes from Egypt around 3000 B.C., and is
mentioned in numerous historical sources including the Bible. Chapter 47, verse 33 of
the Book of Genesis describes the tax collection practices of the Egyptian kingdom,
explaining that the Pharaoh would send commissioners to take one- fifth of all grain
harvests as a tax.

Tax practice continued to develop as Greek civilization overtook much of Europe,

North Africa and the Middle East in the centuries leading up to the Common Era. The
Rosetta Stone, a clay tablet discovered in 1799, was a document of new tax laws
decreed by the Ptolemaic Dynasty in 196 B.C. Named after its leader Ptolemy V, this
kingdom was a product of Alexander the Great’s legendary conquest of huge swaths of
territory, resulting in a melding of Ancient Greek and other languages. The text of the
Rosetta Stone was therefore written in both Greek and Egyptian hieroglyphic script, and
its discovery served as a breakthrough in decoding one of the oldest forms of written
language.

From the Roman age and through medieval European history, new taxes on
inheritance, property and consumer goods were levied, and often played a role in war,
either by funding them or provoking them. Other cradles of civilization, such as ancient
China, also levied taxes under the authority of a strong centralized government. The
Chinese T’ang and Song Dynasties employed a methodical census record to track their
populace and impose the proper taxes on them. These funds and materials were then
used to support armies and construct canals for transportation and irrigation, among
other projects. The Mongol Empire that took control of much of Asia around 1200
instituted tax policy designed to influence large-scale production of certain goods like
cotton.

INTERNATIONAL TAXATION

A discipline of study and practice that centers on the application of taxes and tax
law in the international community as it relates to individuals, businesses and
government agencies conducting cross-border commerce. The myriad of tax treaties,
territorial tax laws and their effect on extraterritorial income requires the interpretive
expertise of scholars and practitioners who specialize in international taxation.

ASIAN TAXATION

The perspective of Asia’s governments, taxes can be used to either ensure that
investments flow in to their own jurisdiction, or as a means to subsidize government
spending. Conversely, from the standpoint of companies and individual wage earners,
they can help determine whether a particular jurisdiction suits their business model and
occupation.

There are numerous taxes which will be applicable for foreign businesses and
wage earners in Asia, including corporate income tax (CIT), individual income tax (IIT),
withholding tax, and indirect taxes such as value added tax (VAT) and goods and
services tax (GST). Understanding how these various taxes function is integral both for
companies wishing to access Asia’s emerging markets, and individuals looking to work
in the region.

TAXATION IN THE PHILIPPINES

The principal taxes levied include: taxes on income and gains, taxes on

transactions, and taxes on property. Taxes on income and gains include income tax and

capital gains tax on sale of shares of stocks and real property. Individual resident

foreigners who derive their income from all sources in the Philippines and in foreign

countries are taxed from 1-35% on gross compensation income (arising from an

employer-employee relationship) and net on non-compensation (business and other)

income are taxed accordingly: twenty percent (20%) on royalties, prizes, and winnings.

Twenty percent (20%) interest on bank deposit and substitute arrangements, and five

percent (5%) capital gains tax on sale of realty.

 INTRODUCTION TO THE TAX SYSTEM

The laws governing taxation in the Philippines are contained within the

National Internal Revenue Code. This code underwent substantial revision

with passage of the Tax Reform Act of 1997. This law took effect on January

1, 1998.

Taxation is administered through the Bureau of Internal Revenue

which comes under the Department of Finance. The chief executive of the

Bureau of Internal Revenue is the Commissioner who has exclusive and

original jurisdiction to interpret the provisions of the code and other tax laws.

The commissioner also has the powers to decide disputed assessments,

grant refunds of taxes, fees and other charges and penalties, modify payment

of any internal revenue tax and abate or cancel a tax liability. Taxpayers can

appeal decisions by the Commissioner directly to the Court of Tax Appeals.

THE TRAIN LAW

By Jan. 1, 2018 the Tax Reform for Acceleration and Inclusion (TRAIN) Act took

effect. Being the first package of the Comprehensive Tax Reform Program (CTRP),

TRAIN 1 introduced a lot of significant changes. Among its purposes was to raise

revenue for the government’s social services and infrastructure programs. TRAIN 1

reduced personal income taxes after 20 long years of non-adjustment of tax rates; but it

imposed higher excise taxes on automobiles, petroleum products, tobacco, sugar-

sweetened beverages and other non-essential goods. The legislators intended that with

the people’s support, all these reforms will ultimately result in lower prices, more job

opportunities and a brighter future for each and every Filipino.

Before the implementation of the TRAIN Law, its detractors theorized that the

increase in petroleum prices would cause a domino effect and, ultimately, lead to an

increase in the prices of goods and services, falling on the shoulders of consumers,

especially the poor. Lo and behold, the rise in prices of everyday commodities was very

much felt since the beginning of 2018. Burdened by the price shock, there was an

uproar from citizens seeking the suspension of the law. While it is true that the TRAIN

Law was not all to blame, we cannot discount the inability of ordinary people to afford

rice, not to mention soft drinks, alcohol, and cigarettes, and the fuel necessary for daily

transportation. Mothers and homemakers found themselves on the front lines as their

household budgets bought fewer and fewer groceries. Restaurants started skimping on

portion sizes or simply charged more.

Although the individual income tax brackets have finally been adjusted and

augmented by the TRAIN Law, they were accompanied by a whopping surge in

inflation. In October, inflation hit 6.7%, moving even further away from the Bangko

Sentral ng Pilipinas’ target range of 2-4% for 2018. Although the causes include world

oil prices or other forces, it is clear that the rise in inflation was partly caused by TRAIN.

Adding fuel to the fire, whereas the higher excise taxes target the rich, the increase in

prices hurt the poor the most. Hence, the wide gap between the rich and the poor

remains.
 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

PROVISIONS OF TRAIN LAW

President Duterte has vetoed certain provisions of the TRAIN. The vetoed five line items
are the following provisions:

1. Reduced income tax rate of employees of Regional Headquarters (RHQs), Regional

Operating Headquarters (ROHQs), Offshore Banking Units (OBUs), and Petroleum
Service Contractors and Subcontractors;

2. Zero-rating of sales of goods and services to separate customs territory and tourism
enterprise zones;

3. Exemption from percentage tax of gross sales/receipts not exceeding five hundred
thousand pesos (P500,000.00);

4. Exemption of various petroleum products from excise tax when used as input,
feedstock, or as raw material in the manufacturing of petrochemical products, or in the
refining of petroleum products, or as replacement fuel for natural gas fired combined
cycle power plants; and

5. Earmarking of incremental tobacco taxes.

The TRAIN raises significant revenues to support the President’s priority social
and infrastructure programs, which will help realize his administration’s goal of reducing
the poverty rate from 21.6 to 14 percent by 2022. Some 70 percent of the incremental
revenues will help fund the government’s infrastructure modernization program, while
the balance will go to social services.

Starting 2018, the government expects to raise funds equivalent to about two-
thirds of the incremental revenues targeted under this tax reform law. The Congress has
committed to pass the rest of the TRAIN’s provisions representing the remaining one-
third of the targeted revenues in early 2018 to help us achieve our revenue and deficit
targets.

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.

WHO ARE UNDER THE TRAIN LAW?

Under TRAIN Law, self-employed and professionals were allowed to avail

themselves of the optional 8 percent tax in lieu of the graduated personal income tax

and percentage tax. The TRAIN Law also stated that it will be available to those whose

gross sales do not exceed the VAT threshold.

IMPORTAN OF THE TRAIN LAW

The first, and perhaps the most important part of the tax reform, is the lowering of

the personal income tax. Subsequent regulations also clarified certain portions of the

personal income tax, specifically the optional 8 percent rate.

By 2018, government attained 108 percent of its collection target and, as

earmarked in the law itself, funded crucial infrastructure and social protection programs.

An estimated three hundred thousand jobs were created in construction due to

increased spending in infrastructure and, as of the first quarter of 2019, P22 billion were

given to poor households through the Unconditional Cash Transfer program and P500

million support to qualified jeepney operators via the Pantawid Pasada program.

TRAIN has yielded additional benefits to the economy. The latest was the

upgrade last week of the Philippine investment grade credit rating by S&P to BBB+,

surpassing countries like Italy, Portugal and Indonesia, and placing the country at par

with Mexico, Peru and Thailand. This will lower the cost of borrowing of the government,

at around 3 billion annually for the next 2 years, according to the Treasury, and private

sector borrowers alike, and make the Philippines more attractive for investments.
AUTHORS OF THE TRAIN LAW

17th Congress

Senate Bill No. 1592

TAX REFORM ACCELERATION AND INCLUSION (TRAIN)

Filed on September 20, 2017 by Recto, Ralph G., Gordon, Richard J., Legarda,

Loren B., Zubiri, Juan Miguel F., Angara, Juan Edgardo "Sonny" M., Villar, Cynthia A.,

Ejercito, Joseph Victor G., Binay, Maria Lourdes Nancy S., Pimentel, Aquilino Koko III

L., Aquino IV, Paolo Benigno "Bam", Escudero, Francis "Chiz" G., Sotto III, Vicente C.,

Villanueva, Joel, Gatchalian, Sherwin T.

Scope: National

Legislative status: Consolidated with Approved Bill (12/19/2017)

The measure was passed, with the support of a cross-section of business groups

(including the Management Association of the Philippines, PCCI, and Go Negosyo), civil

society (such as the Foundation for Economic Freedom, Action for Economic Reform),

international organizations (such as the Asian Development Bank, the International

Monetary Fund, and the World Bank), academe, and former Department of Finance

Secretaries and Undersecretaries.

TRAIN LAW 1

The Tax Reform for Acceleration and Inclusion (TRAIN) under the

Comprehensive Tax Reform Program seeks to correct a number of deficiencies in the

tax system to make it simpler, fairer, and more efficient.

Specifically, TRAIN corrects the longstanding inequity of the tax system by

reducing income taxes for 99 percent of income taxpayers, thereby giving them much-

needed relief after 20 years of non-adjustment. It also raises significant revenues to

fund the President’s priority infrastructure programs to reduce poverty incidence from

21.6 percent in 2015 to 14 percent by 2022.

70 percent of the incremental revenues of TRAIN will go to infrastructure and the

Build, Build, Build program, while the balance will go to social services programs.

In TRAIN, Congress passed two-thirds of the needed revenue for 2018 and is

expected to pass the balance in 2018 to help achieve our revenue and deficit targets.

 Did TRAIN 1 attain its objectives? Or more specifically for the individual: Was
the increase in net income due to the decrease in income tax rates enough to
counter the higher inflation rate and increase in prices?

The answer lies in whether or not there has indeed been an

improvement in the effective purchasing power of Filipinos. Purchasing power
is an important indicator of the economic condition of the nation. All else
being equal, inflation decreases the amount of goods or services one is able
to purchase; and reduced purchasing power leads to a decrease in living
standards. It is hoped that the tax reforms will produce more benefit than
harm, and that such advantages will trickle down to ordinary people sooner.
Periodically reviewing the effects of the law is key, along with efficient
execution, to ensure that tax collection is indeed put to good use.

TRAIN LAW 2

TRAIN 2 will allow for a reduction in the 30 percent corporate income tax rate,
and this will help with the third and fourth features of a good tax system—efficiency and
competitiveness. One of the principles in public finance is that distortion, or the decline
in society’s well-being due to a tax, rise disproportionately with the tax rate. For this
reason, it is more efficient to have a broader tax base and a lower rate, and that is what
TRAIN 2 is trying to do for corporate taxation. A lower corporate tax rate will make the
Philippines’ tax system more competitive, as it currently has the highest corporate tax
rates in ASEAN.

TRAIN 2 aims to help by replacing the 123 special laws that govern tax
incentives with a single law, and bring the 14 different investment promotion agencies
under a single body, the Fiscal Incentives Review Board. One lesson from history is that
the government should not be in the job of “picking winners”—the track record of
countries around the world in doing this is not good, and it often stimulates lobbying for
personal gain. Rather, incentives should be based on firms’ documented ability to
deliver, whether it be creating more jobs, raising incomes, or increasing exports.

TRAIN 2 and the broader tax package are critical to strengthening the
Philippines’ tax system. Passage of this important legislation will demonstrate the
commitment of Congress, and the country more broadly, to the reforms that are needed
to spur growth, reduce poverty and inequality, and achieve upper middle-income status.
It will also set the foundations for stronger and more inclusive growth for the next
generation of Filipinos.

BIBLIOGRAPHY

http://bestphilippinesretirement.com/retireology/taxation-in-the-philippines/

https://www.bworldonline.com/revisiting-the-train-law/

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

https://business.inquirer.net/261521/train-law-how-was-it-implemented#ixzz5x0qXNTBK

https://www.bworldonline.com/seeing-the-train-law-in-its-proper-perspective/

https://senate.gov.ph/lis/bill_res.aspx?congress=17&q=SBN-1592

http://taxreform.dof.gov.ph/tax-reform-packages/p1-train/

https://www.bworldonline.com/revisiting-the-train-law/

https://www.adb.org/news/op-ed/train-2-and-features-good-tax-system-yasuyuki-sawada