The Philippines’ New Tax Reform: Your Ultimate Guide

“Taxes are the price we pay for civilization,” U.S. Supreme Court Justice Oliver Wendell Holmes Jr. said.

While the word ‘tax’, typically repulses most people, it affects every citizen. Taxes are the lifeblood of every government – vital to a county’s economic growth and improvement.

With an outdated tax system that was adopted 20 years ago, a drastic redesign of the Philippine tax environment remained a bold yet arguably irresolute move. While there is still a great deal of confusion and fear surrounding the new tax reform law, most Filipinos are ultimately interested in how the new law will impact ordinary citizens.

Why Does Government Collect Taxes?

According to the Department of Finance:

The government collects taxes to provide basic services, such as education, health, infrastructure, and other social services for all.

These taxes are used to pay for our doctors, teachers, soldiers, and other government personnel and officials.

Taxes are also used to build schools, hospitals, roads, and various infrastructure for connectivity, and industrial and agricultural facilities.

Prioritizing these investments would give the people an opportunity to contribute in economic progress and nation-building.

Philippine Taxes: Then and Now

Before the new tax reform took into effect, the previous Philippine tax system had one of the highest income tax rates compared to its ASESAN counterparts. Similarly, a Global Competitiveness Report 2015-2016 revealed that the “complexity of tax regulations’ and the “high tax rates” in the Philippines make doing business in the country problematic.

Previous taxation in the Philippines was overly complicated and burdensome, especially for small taxpayers. The previous tax system was only mildly progressive, and even said to be borderline regressive. This meant that poor Filipinos pay a larger fraction of their income in taxes compared to the rich.

Fortunately, the new tax reform law is an attempt to overhaul the country’s 20-year old tax regime.

The new income tax rates seek to correct the outdated tax laws into a more progressive tax system. More importantly, the rich and the poor contribute to allow better services to the people. Aside from being easier for taxpayers to understand and comply with their liabilities, the new tax reform law will also minimize the administrative costs of collection.

What is TRAIN?

Finance Secretary Carlos Dominguez III explains how the implementation of the Tax Reform for Acceleration and Inclusion (TRAIN) law can benefit the citizenry and the government during a press briefing.

Originally crafted by the Department of Finance, the Tax Reform for Acceleration and Inclusion (TRAIN) is the first package of the comprehensive tax reform program (CTRP) envisioned by President Duterte’s administration. The law seeks to correct a number of deficiencies in the tax system to make it simpler, fairer, and more efficient.

The TRAIN law is part of the 10 Point Economic Agenda of Duterte as mentioned in the Department of Health website. The Tax Reform for Acceleration and Inclusion Act is the first tranche of President Duterte’s tax reform initiative, which started its implementation in January 2018. The second tranche is expected to be implemented by January 2019.

The new tax reform law lowers personal income taxes, while raising duties on fuel, cars, coal and sugar-sweetened drinks, to name a few. The revenues raised from such measures will help fund Duterte’s 8-trillion infrastructure program.

TRAIN’s Goals:

“Revenues from the TRAIN will fund our priority projects to ensure quality education, including free tuition in state universities and colleges, quality health care, social protection and conditional cash transfers, improved infrastructure [under] the ‘Build, Build, Build’ program, and the reconstruction of Marawi,” Duterte said in a speech after signing into law his tax reform initiative.

The new tax reform law, as part of the economic agenda of Duterte, expects to yield P92 billion in additional revenues in its first year of implementation.

According to a guide released by the Presidential Communications Operations Office, the new Tax Reform for Acceleration and Inclusion law also aims to reduce the poverty rate from 26% to 17% by 2020, uplifting about 10 million Filipinos from poverty. By 2040, the law aims to eradicate extreme poverty, provide equal opportunities through inclusive economic and political instigations and achieve high-income status.

In December 2017, President Rodrigo Duterte signed into law the first package of his Tax Reform Acceleration and Inclusion Act implementation, as reported by ABS-CBN News.

Senator Sonny Angara is one of the original authors of the country’s latest tax reform, according to Inquirer. He has been pushing for Tax Reform since the past administration. Angara explains that the new Philippines taxation system is the biggest Christmas gift the government could give to every Filipino.

In the video below, Angara explains the tax break under the Senate’s proposed version of taxation law in the Philippines.

What are TRAIN’s new tax reform laws?

TRAIN’s new laws include the following:

  • Lower the Personal Income Tax (PIT)
  • Increasing the Excise Tax on select items
  • Expand the Value-Added Tax (VAT) Base
  • Simplify the Estate and Donor’s Tax

New Personal Income Tax:

Rappler shares how your new income tax is computed.

Tax Calculator: Compute Your New Income Tax

With the new tax reform system, every Filipino must know how to compute for individual income tax in the Philippine along with personal tax exemptions.

The DOF also encourages every working Filipino to know his or her new BIR income tax by computing with the DOF official income tax calculator for 2018.

Department of Finance Tax Calculator

Increased Excise Taxes:

These new train laws are just the initial phase of the first comprehensive tax reform program (CTP) package of the Duterte administration. The second phase of the measure, which will be composed mainly of tax administrative measures, is expected to be passed by the first quarter of 2018 and implemented by January 2019.

Similar to the first tranche, the second measure seeks to cut corporate income taxes from 30% to 25%, according to a speech made by Finance Secretary Sonny Dominguez. To be able to do that, Dominguez explains that there must also be a reduction in the amount of incentives as well.

In the video below, CNN Philippines explains what the second tranche of TRAIN will focus on.

Excise Tax on Sweetened Beverages

In the new tax reform law, beverages using sweeteners are taxed P6 per liter while beverages using high fructose corn syrup are taxed P12 per liter.

In the video below, Angara expressed concerns over the proposed tax on sugar drinks.

Exempted from the sweetened beverage taxes include milk, coffee, 100% natural fruit and vegetable juices, meal replacements and medically indicated drinks and beverages that are made of coco sugar and stevia.

Coconut Sugar

Stevia Sugar

Active Beat

Automobile and Fuel Excise Taxes

New rates for non-hybrid cards will be 4% based on manufacturer’s price of up to P600,000, 10% for cars over P600,000 to P1 million, 20% for cars worth P1 million to P4 million, and 50% for cars priced at more than P4 million.

An excise tax will be charged on diesel at P2.50 per liter per year, and will be raised to P4.50 the following year, and P6 by 2020. Similarly, LPG will be taxed P1 per kilo in 2018, P2 pesos in 2019, and P3 by 2020.

Regular and unleaded premium gasoline will be taxed P7 in 2018 from the current P4.35, and will increase to P9 in 2019 and P10 in 2020.

Excise Tax on Coal and Mining

During the law’s first year of implemetation, excise tax on coal was raised to P50 per metric ton from P10 per meric ton. It wil increase further to P100 in its second year, and P150 on its third year. Coal tax has remain unchanged since 1988.

Tobacco Excise Tax:

The previous sin tax on tobacco was at P30 while the TRAIN law introduced an imposed tax of P32.50 for the period of January 1 to June 30, 2018. By July 1, 2018, sin tax on tobacco will increase to P35 until December 31, 2019. Consequently, taxes will increase further to P37.50 in 2020-2021, P40 in 2022-2023, and an annual increase of 4% in 2023 onwards.

Excise Tax on Cosmetic Surgery:

Cosmetic procedures, except those used to correct deformities from birth, disease or due to accidents, will be taxed 5%.

New Estate Tax and Donors’ Tax:

The TRAIN law has simplified the computation of estate tax, which is now fixed at 6% if the value of the net estate is over 5 million. No taxes shall be implemented for values under P5 million while net value estates of at least P10 million are exempted from taxes.

Previous Donor’s tax was up to 15% of gift net donations while the new TRAIN law taxes only 6% of gifts net donation worth P250,000 and above, regardless of the relationship between the donor and recipient.

Simplified Value Added Tax (VAT)

VAT exemptions on raw food, agricultural products, health and education, as well as those for senior citizens and Persons with Disabilties (PWDs) were retained. By 2019, the sale of drugs for diabetes, high cholesterol, and hypertension will be free of VAT.

By 2012, socialized and mass housing projects worth P2 million and below will be VAT-free.

Government-owned and control corporations, state universities and colleges, as well as national government agencies will go through a shift from VAT exemption to subsidy through tax expenditure funds under the National Budget.

How Tax Exemptions Add Up:

ABS-CBN’s video below explains the details under the new tax reform package and how new income tax exemptions add up.

TRAIN and Your Livelihood:

The Tax Reform for Acceleration and Inclusion (TRAIN) Act will ease taxes on 99% of income taxpayers. According to Senator Angara, the new tax reform law would increase the take-home pay of workers. “Ultimately, it is about choice – giving taxpayers greater control over how their hard-earned money is saved or spent,” Pierre Martin Reyes explains in a CNN Philippines article.

“Next year (2018) would mark the beginning of a new, simplified and fairer income tax system. We hope we have fulfilled our ultimate goal to provide millions of Filipinos relief from their tax burdens that would put more money in their pockets to help them spend for their families and loved ones,” Angara said.

In the previous tax system, those earning minimum wage and below were already exempted from tax. However, those earning above the minimum wage found it difficult to prosper due to the large tax cuts from their incomes.

According to the Philippine Statistics Authority, the annual income of an average Filipino family in 2015 was P267,000. Such people had to pay P38,131 in taxes before the TRAIN law while they only need to pay P504 under the new tax law proving the large discrepancies in income tax brackets in the Philippines.

The Department of Finance (DOF) perfectly illustrates how the new tax reform law can affect a typical Filipino man and his family. A fictional person named John Cruz is able to save about P21,867 in taxes in the new measures implemented by the new TRAIN law.

After the ceiling on annual income was set at P250,000, an estimated 7 million will be exempt from paying income taxes. Since revenues from the new tax rates would jumpstart infrastructure projections in the country, the new tax reform law would also help improve the lives of every Filipino.

Many employers have noticed that their employees no longer like getting promoted or regularized due to harsh working conditions and little take home pay. According to a radio interview with Go Negosyo Angpreneur Eric Caeg, more Filipinos will be encouraged to take in promotions and be regularized with the new tax law.

TRAIN Reform Myths:

While the TRAIN law is expected to improve the lives of the Filipino people, there are still many myths and misconceptions that surround is implementation, according to the Department of Finance.

1. The burden of the tax will be on the poor, not on the rich.

Many think that the burden of the tax will be on the poor instead of the rich. However, in truth, Filipinos will contribute based on their capacity to pay, allowing those who have higher income to shoulder the burden of taxes more compared to those with lower income.

2. Lowering personal income taxes means more money in people’s pockets, boosting consumption, and consequently, stimulate the economy. No need to increase taxes.

It is also not true that lowering personal income taxes means more money in people’s pockets, which will eventually boost consumption, and consequently stimulate the economy eliminating the need to increase taxes.

The tax reform will be able to increase spending in public investment, which will stimulate the economy more and benefit the poor allowing a more inclusive way of spending shared resources, instead of merely boosting individual consumption spending by lowering all taxes.

3. Only the personal income tax needs to be fixed. All the other proposed tax changes should not be pushed.

Many Filipinos argue that only personal income taxes must be fixed while the other proposed tax changes should not be pushed. While there is something certainly wrong with our Personal income Tax (PIT), restructuring the PIT alone will not correct the tax system’s inequity.

4. The government is already underspending. There is no need to raise additional revenue.

The misconception that the government is already underspending and does not need to raise additional revenue is false. Reforms are in place to ensure proper sending and utilization of budgets.

Addressing underspending alone with not be enough. The ultimate goal is to address the inequity of the tax system by making it progressive and pro-poor through additional investments in social services, health, education, and infrastructure.

It is difficult to determine whether the Philippine’s new Tax reform is either good or bad, due to several aspects involved in its implementation. But now that the TRAIN law is into full effect, Filipinos remain optimistic to see that the results of changes will ultimately be able to reach its intended beneficiaries.

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