Train law: What does it change?

Edward G. Gialogo
Published 6:23 PM, January 04, 2018 Updated 12:41 PM, January 05, 2018, RAPPLER

As a tax lawyer, I noticed that there are a lot of news reports on the
changes. But actually, there are much more significant changes under
the Train law which are not being reported.

As we celebrated the New Year, the Tax Reform for Acceleration and
Inclusion (Train) Law or Republic Act No 10963 took effect on January
1, 2018. Train overhauls the outdated National Internal Revenue Code
(NIRC) which was adopted 20 years ago.
As a tax lawyer, I noticed that there are a lot of news reports on the
changes. But actually, there are much more significant changes under
the Train law which are not being reported.

Train relatively decreases the tax on personal income, estate, and

donation. However, it also increases the tax on certain passive
incomes, documents (documentary stamp tax) as well as excise tax on
petroleum products, minerals, automobiles, and cigarettes.
The Train law also imposes new taxes in the form of excise tax on
sweetened beverages and non-essential services (invasive cosmetic
procedures) and removes the tax exemption of Lotto and other PCSO
winnings amounting to more than P10,000.

Nonetheless, the new law also contains praiseworthy provisions which

aim to simplify tax compliance.

Reduced taxes

Personal Income Tax

The most popular part of the Train law is the reduction of personal
income tax of a majority of individual taxpayers. Prior to the
enactment of the new law, an individual employee or self-employed
taxpayer would normally have to pay income tax at the rate of 5% to
32%, depending on one's bracket.

Under Train, an individual with a taxable income of P250,000 or less

will now be exempt from income tax. Those with a taxable income of
above P250,000 will be subject to the rate of 20% to 35% effective
2018, and 15% to 35% effective 2023. Moreover, the deductible 13th
month pay and other benefits are now higher at P90,000 compared to
P82,000 under the old law.

The table shows the comparison of the brackets and tax rates under
the NIRC and Train:
Another innovation under Train is the option of self-employed
individuals and/or professionals whose gross sales or receipts do not
exceed P3,000,000 to avail of an 8% tax on gross sales or gross
receipts in excess of P250,000, in lieu of the graduated income tax
rates.

It is not being highlighted, however, that some items that were

previously deducted to arrive at taxable income had been removed
under Train. These are the personal exemption of P50,000, additional
exemption of P25,000 per dependent child, and the premium for health
and hospitalization insurance of P2,400 per year.

Estate Tax

The estate tax rate was also changed from 5% to 32% of the net
estate to a flat rate of 6%. Additionally, the following deductions
allowed in computing the net estate (to be subjected to estate tax)
were increased:

Donor’s tax

The donor’s tax rate was also amended to a single rate of 6%

regardless of the relationship between the donor and the donee. In the
old law, the rates of donor’s tax were 2% to 15% if the donor and donee
are related, and 30% if otherwise. However, the donation of real
property is now subject to Documentary Stamp Tax of P15 for every
P1,000.

Value Added Tax

There are also amendments to VAT which lessen the burden of
taxpayers:

1. Increase of VAT threshold from P1,919,500 to P3,000,000

2. Starting 2019, the sale of drugs and medicines for diabetes,
high cholesterol, and hypertension will be exempt from VAT

3. Increase of VAT exemption for lease of a residential unit

from P12,800 to P15,000

4. Association dues, membership fees, and other assessments

and charges collected by homeowners associations and
condominium corporations are now expressly VAT exempt

Increased taxes

Passive Income

Train imposes higher taxes on some passive incomes, including

interest income from dollar and other foreign currency deposits.

There is also a significant increase in the tax on sale of shares of

stocks.

Excise Tax

Train imposes higher excise taxes on cigarettes, manufactured oils

(petroleum products), mineral products and automobiles.

Cigarettes
Manufactured oils and other products

Mineral products

Automobiles
Hybrid vehicles shall be subject to 50% of the applicable excise tax
rates. But purely electric vehicles and pick-ups shall be exempt from
excise tax.

Documentary Stamp Tax

Unlike the House of Representatives’ version of Train wherein no

change was introduced on the rates of Documentary Stamp Taxes
(DST), Train increases the DST on almost all taxable documents.
New taxes

Aside from increase and decrease of certain taxes, Train also

introduces new taxes in the form of excise tax on sweetened
beverages and non-essential services.

Sweetened Beverages

Non-essential services

Invasive cosmetic procedures directed solely towards improving,

altering, or enhancing the patient’s appearance is now subject to
excise tax of 5%.

PCSO winnings

Previously, PCSO winnings, regardless of amount, were exempt from

tax. Train subjects PCSO winnings to a 20% final withholding tax if the
amount is more than P10,000.

Simplified tax compliance

Apparently, the Philippine tax system is a very complicated one. This

was certainly considered by Congress when it enacted the Train law.
Consequently, Train introduces amendments which are geared towards
simpler tax compliance. Some of these amendments are:

1. The Income Tax Returns shall not be more than 4 pages

2. The Tax Return for final and creditable withholding taxes
shall be filed quarterly instead of monthly

3. With regard to estate tax, the following measures were

adopted to simplify its computation and payment:

o In lieu of actual funeral expenses (up to P200,000) and

medical expenses (up to P500,000), Train increases the
standard deduction (wherein no substantiation is
required) from P1,000,000 to P5,000,000

o Notice of death is no longer required

 o CPA certification is now required only if the gross
estate is above P5,000,000 (up from P2,000,000)

o The deadline for filing of estate tax return is now one

year from death (before, 6 months from death)

o Bank deposits left by the decedent may be withdrawn

by the heirs subject only to 6% withholding tax. Before
a certification from the BIR that estate tax has been
paid was required.

4. Beginning January 1, 2023, the filing of VAT Return and

payment of tax shall be done quarterly instead of monthly

5. The BIR is required to act on application for VAT refund

within 90 days. Otherwise, the BIR official, agent or
employee will be criminally liable.

6. The Financial Statements of a taxpayer should be audited if

the gross annual sales, earnings, receipts or output exceed
P3,000,000 (up from P150,000)

With the enactment of the Train law, the government expects to

generate more revenues to fund its "Build, Build, Build" projects and
other programs. At the same time, the labor sector is expected to be
freed from the burden of outdated and inequitable personal income
tax. Hopefully, this benefit for the workers can still be achieved
despite the increase in prices of some goods that they consume.

Read our law office's comprehensive comparison of the NIRC and the
Train law here. – Rappler.com