Did you know that the Philippines has one of the lowest tax rates in Asia? While this may be good news for business owners, it also means that the government is struggling to generate enough revenue to fund important services like education and healthcare. In an effort to increase tax revenue, the government has proposed a train law reform that will increase taxes on goods and services. If passed, this new law will have a major impact on businesses and employees in the Philippines. Read on to learn more about the proposed train law reform and what it could mean for you.
Effects of Train Law on Philippine Tax System
The train tax law was fully implemented in 2018. This tax reform has an aim to make our tax system easier, generate more investments, and establish more job opportunities, and decrease poverty. Besides, these tax reforms aiming to raise more revenue that will be used for building more infrastructures that will help to enhance education, health, and public services.
Implementing this reform affects personal income tax, estate tax, donor’s tax, value-added tax (VAT), passive incomes, documentary stamp tax (DST), and other administration rulings and procedures. These changes created a tax on cosmetic surgery and sugar-sweetened beverages. For more information, you may visit the BIR homepage.
Impact of train law on Personal Income Tax
The implementation has a significant effect on the personal income tax not only on the tax rates but also on personal exemptions. The old individual tax grants a personal exemption of 50, 000 to any individual and 25, 000 additional exemptions in every qualified dependent up to four dependents. Any person who earned less than 10,000 taxable income is not subject to the personal income tax. Here are the other incomes that are not subject to tax.
(Read more: Income Tax Train Law and New Rate)
Train law had a more significant impact on this tax under the following reforms:
- Increased the amount to be exempted from personal income tax. This new reform rises from 10,000 to 250,000.
- Remove the personal and additional exemptions and premiums paid on health or hospitalization insurance from computing the taxable income tax. It included these exemptions on the 250,000 as tax-exempt.
- It sets the highest rate from 32% to 35% tax rate on a taxable amount of over 8 million.
- Increasing the amount of tax-exempt benefits ceiling amount from 82,000 to 90,000. These benefits include only those benefits that are not subject to tax, e.g., 13th-month pay and other benefits.
- Exemption from tax of de minimis benefits, mandatory contributions such as GSIS, SSS, PhilHealth, Pag-Ibig Fund, and other union dues remain.
- For Self-employed and professionals ‘ individuals will be subject to a regular personal income rate or 8% of gross sales/receipts above 250 000. However, if the gross sales/receipts exceed 3 million will be subject to PIT rates.
- Final tax on PCSO and lotto winnings exceeding 10, 000 will be subject to a final fee of 20%.
- It is an increase in the tax rate from 32% to 35% on fringe benefits tax (FBT).
- Exclude the preferential tax rate of 15% for employees of regional area headquarters, regional operating headquarters, offshore banking units, and petroleum service contractors and subcontractors.
- Optional standard deduction by a general professional partnership (GPP) may only be availed at once, either by the GPP or the partners comprising the partnership.
Effect on Estate Tax under Train Law
This tax reform simplifies the estate tax rate from having many rates (5% to 20%) to a one tax rate of 6% based on the value of the net estate of the decedent. The net estate of the decedent is computed by deducting all the allowable deductions from the total gross estate.
(Read more: Estate Tax Train Law in the Philippines)
This train law impacted the computation of estate tax and administrative procedures. How this train law changes the calculation of estate tax?
- Removes the deductions for nonresident estates on expenses, losses, indebtedness, and taxes but provides for a standard deduction amount to 500,000.
- Change the number of family homes from 1 million to 10 million. It also removes the conditions to claim as a family home deduction- that family home must have been the decedent’s family home as certified by the barangay captain of the locality.
- Increasing the amount of standard deduction from 1 million to 5 million, which removes the funeral expenses, judicial, and medical expenses.
- A higher amount of gross value of estate provided in estate tax returns requires a document that is duly certified by a Certified Public Account from 2 million to 5 million.
- Removes the provisions that required executor, administrator, or any of the heirs to include in the estate tax return that part of the non-resident alien’s gross estate not in the Philippines to claim deductions.
Besides the changes in the computation of estate tax, here is the other effect of train law on the administrative procedures:
- Filing of the Notice of Death. It cancels the filing of a notice of death of the decedent by his/her executor, administrator, or any of the legal heirs within two (2) months after the decedent’s death.
- Limitations of Withdrawal. The 20,000-escrow fee that may be withdrawn from the bank account of the decedent without certification from BIR is removed but be subject to a final withholding tax of 6%.
- Extensions of Filing. They should file the estate tax return from six (6) months to one (1) year from the decedent.
- Installment Basis. It provides installment payment of estate tax due if the cash is insufficient. It allows refunds within two (2) years from the legal date for its payment without civil penalty and interest.
Uniform Donor’s Tax Rate under Train Law
Donor’s tax under train law made it easier to compute the donor’s tax. This tax reform repeals the eight-bracket schedule with rates from two percent (2%) to fifteen percent (15%). This new tax reform set a single donor’s tax rate of six (6) percent of total gifts above 250, 000. This tax rate applied to both strangers and non-stranger.
This new donor’s tax under train law removes dowries or gifts made by parents to each of their legitimate, recognized natural, or adopted children on account of marriage. Last, any donative free-sale, exchange, or other transfer of property made in the ordinary course of business shall be considered as made for an adequate and full consideration in money or money’s worth and is therefore not subject to donor’s tax.
(Read more: Donor’s Tax Train Tax Law 2019 in the Philippines)
Changes on Value-added tax (VAT) under Train Law
In terms of the impact of train law on this new tax reform, value-added tax (VAT) is greatly affected. Train law repeals 54 provisions on VAT exemptions and zero-rating under special laws to broaden the VAT base. Besides, this new tax reform will include electric cooperatives as part of the sale or exchange of services that would be part of VAT. Here are the four (4) changes that you should know:
(Read more: Value Added Tax (VAT) under Train Tax Law)
#1. Zero-Rated Transactions
Train law removes foreign-currency-denominated sales from VAT zero-rating and subjects the value-added tax indirect exporters and agents only upon the establishment and implementation of an enhanced VAT refund system.
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#2 VAT Exemptions Status
Some exemptions remained as vat exempts after the application of train law in the Philippines. However, there are other VAT exempts added to this new tax reform. This new vat exempts the vat on the sale of drugs prescribed for diabetes, high cholesterol, and hypertension (RMC 2-2019).
Here are the vat exemptions that remained upon implementing train law this year, 2019.
- Educational services
- Heath Services
- Cooperatives
- A person with a disability (PWD).
- Senior Citizens, and;
- Raw Agricultural and Marine Products
#3 Additional to VAT-Exempt Transactions
The train law includes these transactions as part of the VAT-exempt transactions under Sec. 109 of the NIRC of 1997.
- Transfer of property in pursuance of a plan of merger or consolidation
- Associations dues, membership fees, and other charges collected by homeowners’ associations and any condominium corporations.
- Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and last,
- Sale of drugs and medicines that are prescribed for high cholesterol, diabetes, and hypertension, starting this year 2019.
#4 Updates on VAT-Exempt Thresholds
Among the best side of this train law is the increase of the vat threshold on the exemptions. This update on the vat exempt threshold includes a lease of residential units and sales of houses and lots and other residential dwellings.
Before it implemented the train law, it has increased VAT tax thresholds from 1, 500, 000 to 1, 919, 500. In this year, the VAT threshold increases to 3 million, and it will be adjusted not later than January 31, 2021, and every three (3) years after that based on the inflation. Along with these changes, monthly rental on a lease of the residential unit increased from 12, 800 to 15, 000. However, the VAT exempt threshold on sales of houses and lots and other residential dwellings starting on January 1, 2021, decreases from 3,199,200 to 2,000,000.
The outcome of Train Law on Excise Taxes
What’s the effect of train law on excise taxes? Well, it might increase the tax rates, or it could decrease excise tax rates. This new tax reform affects automobiles, petroleum products, sweetened beverages, cigarettes, and mineral products.
#1 Excise tax on Automobiles
RA 10963 restructures the excise tax rates on cars by adding ad valorem tax rates that are directly applied to the net manufacturer’s prices instead of imposing marginal tax rates. The old tax schedule on automobiles started at 2% up to 60% while these new tax rates start at 4% but up to 50% only, which is lesser than the older tax rate.
They’re also things that this tax reform made changes. Hybrid vehicles or any vehicles run by electric energy in combination with gasoline, diesel, or any other power shall be subject to 50% of the applicable excise tax rates. However, those purely electric vehicles and pickup trucks will be exempted from this tax on automobiles. Also, pickups shall be considered as trucks on this tax reform, and it removed the jeep from the definition of jeep/jeepney/jeepney substitutes.
#2 Petroleum Products
Train law increases the tax rates on petroleum products in three succeeding years, starting from 2018 to 2020. When Liquefied petroleum gas (LPG) consider as a raw material in the production of petrochemical products will be zero tax per kilogram.
#3 Sweetened Beverages
Sweetened beverages will be subject to six (6) pesos or twelve (12) pesos depending on the contents. However, any sweetened beverages that are using purely coconut sap sugar and purely steviol glycosides are exempted.
This tax includes sweetened juice drinks, tea, flavored water, energy and sports drinks, cereal and grain, all carbonated beverages, other powdered drinks not classified as milk, juice, tea, and coffee. Last, those other non-alcoholic beverages that contain added sugar.
However, this tax on sweetened beverages exempts all milk products-including plain milk, infant formula milk, powdered milk, meal replacement, and medically showed drinks, ground coffee, instant soluble coffee, and pre-packaged powdered coffee products; and 100% natural vegetables and fruit juices.
#4 Higher Excise Tax Rates on Cigarettes
All of those products that train law had a high impact is on cigarette users. It does not increase the tax rates on cigarettes packed by hand, but also those packed by machines. The old tax rates on tobacco were 30 pesos per pack, those packed by hand and machine.
#5 Increasing Excise Tax Rates on Mineral Products
The train tax law reform increases the excise tax rate on domestic or imported coal and coke from ten (10) pesos per metric ton to fifty (50) pesos for 2018. This year 2019, the tax on mineral products increased to one hundred (100) pesos per metric ton, and in 2020 it will rise again to 150.00 per metric ton. In other cases, locally extracted natural gas, as well as LPG, will not be subject to an excise tax.
Implementation of train law increases the excise tax rates on other mineral products. Previously, the old tax rates on mineral products started from 2% up to 3%. However, this train law imposes a minimum tax rate of 4% and a 6% tax rate as maximum.
All metallic mineral and quarry resources were previously taxed at 2%. Beginning in 2019, the excise tax will be subject to a four percent tax rate (4%) based on the actual market value of the gross output at the time of removal. With those locally extracted or produced, it should be net of excise tax and VAT if imported in determining the value to be used by the Bureau of Customs for tariff and customs duties. Copper and other metallic minerals, gold, and chromite, will be subject at four percent (4%) at the same tax base.
On the other side, indigenous petroleum will be subject to six percent (6%) based on the fair international market price.
Other Taxes Affected by Train Law 2019
Other taxes were not mentioned above that are directly affected by these new tax reforms. Some of these taxes are documentary stamp taxes (DST). For more detailed discussions on DST 2019, you can click this link. Other taxes are foreign currency deposit units (FCDU), capital gains on non-traded stocks, cosmetic procedures, and stock transactions tax (STT).
#1 Foreign Currency Deposit Unit (FCDU)
It might be your first time hearing about the FCDU. If this word is not yet familiar to you, here is the basic definition of this term. According to the CBP circular No. 1389 section 45, it refers to that unit of a local bank or of a local branch of a foreign bank allowed by the Central Bank to engage in foreign currency-denominated transactions.
In section 51, it gives us the list of those transactions with local banks incorporated or registered in the Philippines as FCDU in any currency other than the Philippine peso:
- Accepting demand, time, and call deposits or issue negotiable certificates of time deposits
- Borrow with maturities not exceeding 360 days
- Deposits and extend loans and advances
- Engage in foreign exchange trading and deal in foreign currency instruments.
- Discount bills, acceptances, and negotiable certificates of deposits.
- Take part in interbank short-term transactions of not exceeding 360 days, such as credit lines of Philippine banks with correspondents’ banks, interbank call loans, and interbank loans for general liquidity. Any of these transactions do not require approval from the Central Bank.
Any individual who derives interest income from the above transactions will be subject to the final tax. Also, any domestic corporations from a deposit bank under the foreign currency deposits system is subject to a final tax of 15%. However, a non-resident individual is not subject to this final tax.
The previous final tax on FCDU was 7.5%, which twice after implementing train law. But not all interest income will be subject to these new final tax rates. The interest income of a resident foreign corporation will remain subject to 7.5%.
#2 Capital Gains of Non-Traded Stocks
What are capital gains? It is the gain from the sale or other disposition of shares of stocks. The gain from the sale or disposition of shares of stock shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining the gain, and the loss shall be the excess of the base or adjusted basis for determining loss over the amount realized.
The net capital gains realized by an individual and a domestic corporation from the sale, barter, exchange, or other disposition of shares of stock in a domestic corporation that are not traded in the local stock exchange are subject to 15%. Train law simplifies the computation of capital gains tax because it removes the 5% -10% tax rates. However, the single tax rate is higher compared to the previous tax rates.
This new capital gains tax excludes any net capital gains of a resident foreign corporation and a non-resident foreign corporation.
#3 Capital Gains tax on Onerous Sale of Stocks
The stock transaction tax (STT) increased from ½% tax rate to .06% of the selling price or gross value in money of the shares of stock sold, bartered, exchanged.
Conclusion
The effect of train law on the Philippine Tax System had a high impact on our tax systems. This tax reform changed the personal income tax rates and thresholds to be exempted. It allows more individuals to be exempted from tax. More individuals benefited from this tax system, including those who are employed at the same time having mixed incomes. Train law also provides uniform tax rates for the estate tax and donor’s tax, which made it easier to compute the tax dues. Also, some threshold increases, which is fewer taxes to be paid. One of these revisions of thresholds is personal income tax-exempt from 10,000 t0 250, 000. Estate tax deductions also increased from 1 million to 5 million.
The other effects of train law are not favorable to the additional taxes. For example, excises taxes on automobiles, petroleum products, sweetened beverages the highest tax rates on cigarettes. The other taxes that increased the tax rates were mineral products, foreign currency deposits unit (FCDU), capital gains tax on non-traded stocks, and stock transaction tax (STT).
Overall, train tax law has a constructive effect on social growth and more investment opportunities to come. If you have any comments on the impact of train law, share by dropping your comments below. Yes, drop your opinions.
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