Tax Reform for Acceleration and Inclusion (TRAIN): An Instrument for

Comprehensive and Inclusive Growth

I. Introduction

Real positive change or “Tunay na pagbabago” has always been the mantra of the
Duterte Administration since he took his oath of office. This clamored change includes
comprehensive and inclusive growth manifested by a comfortable life for all, improved
public services, more and better jobs and more money put in the people’s pockets.

Thus, to attain this, the Duterte administration is pursuing a simpler, more efficient,
and more equitable tax system to finance its 10-point socioeconomic agenda. The redesigned
tax system is envisioned to be characterized by low rates and a broad base to promote
investments, job creation, higher and sustained growth, and poverty reduction. The
comprehensive tax reform effort will be undertaken in stages and consists of five packages.
Each package will focus on specific area/s of tax policy, while contributing to the overall
objectives of tax reform and at the same time protecting the government’s aggregate revenue
take.

II. What is TRAIN?

Package 1 of the administration’s Comprehensive Tax Reform Program was filed as

House Bill (HB) No. 4774 in January 2017. Titled “Tax Reform for Acceleration and
Inclusion” (TRAIN), HB 4774 seeks to: (i) repeal current provisions on the personal income
tax (i.e., address bracket creep, shift to a modified gross income PIT regime for simplicity,
and reduce the top marginal rate to 25% over time); (ii) broaden the base of the value-added
tax (i.e., by eliminating a number of exemptions and limiting zero-rating to direct exporters);
(iii) increase the excise tax on petroleum products and automobiles; (iv) reduce the estate tax
and the donor’s tax); and (v) earmark a portion of the incremental revenues generated from
the reform to fund targeted subsidies for the poor and vulnerable sectors.

The compromise bill, HB 5636 which was passed by the lower house in plenary last
May 31, 2017 introduces an excise tax on sugary drinks and modified some of the provisions
of HB 4774.Senate Bill (SB) No. 1408, the version of the TRAIN that was filed by Senator
Aquilino Pimentel Jr, and now the latest version of the bill is SB 1592, which was filed by the
Senate Ways and Means Committee, which substituted all the previously filed bills.

III. Scope of Train

The fist package of the Tax Reform Program encompasses the Personal Income Tax,
Value Added Tax, Oil Excise Tax, Automobile Excise Tax and Excise Tax on Sugar-
Sweetened Beverages.

Personal Income Tax

 The TRAIN aims to adjust brackets to correct income creeping. The personal income
tax (PIT) brackets have remained unchanged since 1997 as the upper and lower boundaries of
the tax brackets have not been indexed to inflation. This implies that taxpayers whose
nominal incomes have increased in the interim may have been pushed into higher tax
brackets even if their real incomes have not gone up, a phenomenon known as bracket creep.

In the current proposal, the income tax brackets is decreased to six from the current
seven brackets. Under the bill, annual compensation income of P 250,000 and below will be
exempted from PIT. Said bill will adjust the income tax brackets such that a lower marginal
tax rate than that under the existing system will be applicable on comparable taxable income
levels with the exception of annual taxable income greater than PhP 5 million which will be
subject to a higher marginal tax rate of 35%.

In 2021, the tax rate will be further decreased. For instance, for those under marginal
bracket ranging P 250,000 to P 400,000, rate will be reduced from 20% to 15% . See Table 1.

Table 1

Thus it is expected that tax rate for 99% of taxpayers will gradually decrease over the
next years of implementation, translating to bigger amount of take home pay for the working
force. For instance, the PIT liability of a call center agent who earns around Php 21,000 per
month will become zero compared with Php 21,687 under the existing PIT regime if she has
two children and Php 34,208.05 if she has no children.

Meanwhile, a high-income earner with a gross annual income of P 13,162,500 who is

currently taxed at P 4,047,456 will have a tax due of P 4,200,186 under the proposed tax
system.
Value-Added Tax

The ideal VAT system is one with a low rate and with exemptions limited to
necessities. This way, the system becomes fair to everyone. However, this is not the case for
the Philippines.

In the Philippines, we have a VAT system with numerous exemptions leading to large
tax leakages. These exemptions incentivize people to take advantage of the system to pay less
tax.

Compared to our neighbor countries, we have 59 lines of exemptions in the Value

Added Tax compared to 37 in Indonesia, 35 in Thailand, 25 in Vietnam, and 14 in Malaysia.
As a result, the Philippines collect less VAT as a percent of our Gross Domestic Product
compared to these countries.

Thus, in order to expand the tax base, the tax reform proposal plans to limit only raw
food and other necessities, such as education and health as well as other items with clear
economic rationale.

The exemptions which are proposed to be removed are cooperatives, power

transmission, lease of residential units, domestic shipping importation, Boy Scouts and Girl
Scouts, low cost and socialized Housing and limit zero-rating to direct exporters.

Excise Tax on Petroleum Products

The current tax rate for oil products have remained unadjusted since 1997, as such, the
revenue take from the source has contracted over time due to the erosion of the peso
denominated tax rates by inflation even as retail prices of petroleum prices have risen at a
faster than inflation. Thus, due to this, it is estimated by the Department of Finance that there
is a Php 145 billion loss annually.

Under the current proposal, rates will be adjusted gradually starting the second half of
2017 to 2019, and will be indexed annually in the succeeding years by 4%.

Table 2.Excise Tax Rate on Oil products

Pesos per liter 1997-2007 2018 2019 2020 2021*

Diesel and essentials Php 0.00 Php 3.00 Php 5.00 Php 6.00 Php 6.24
Gas and non-essentials Php 4.35 Php 7.00 Php 9.00 Php 10.00 Php 10.40

Based on the DOF estimate on the basis of Family Income and Expenditure survey in
2015, the richest 10% of the Filipino households, which is around two million households,
who earn around Php 113,000 and above per month consume almost 51% of fuel.
Furthermore, the top 1% of households who earn Php 288,000 and above monthly consume
13% of fuel, which is already tantamount to what the poorest 50% can consume.
Automobile Tax Rates

The excise tax on automobiles is levied on the basis of the net selling price of the
manufacturer or importer of the same. In the proposed tax system, basic cars will be taxed at
lower rates while more expensive cars will be taxed at higher rates. These revised rates are
lower than those in the original proposal indicated in HB 4774.

Table 3. Excise Tax Rate on Automobiles

Net Manufacturing / Ave Ave

Importation price in Current rates Effective Proposed rates Effective
pesos Tax Rate Tax Rate
Up to 600,000 2% 2% 4% 3%
Over 600,000 to 1.1 12,000 + 20% in 5% 24,000 + 40% in 10%
million excess of 600,000 excess of 600,000
Over 1.1 million to 112,000 + 40% in 15% 224,000 + 80% in 31%
2.1 million excess of 1.1 million excess of 1.1 million
Over 2.1 million 512,000 + 60% in 22% 512,000 + 120% in 45%
excess of 2.1 million excess of 2.1 million
Excise Tax on Sugar-Sweetened Beverages

The proposed tax on sugar-sweetened beverages is a health measure meant to

discourage the consumption of high-sugar beverages while encouraging industry players to
develop healthier product alternatives. The tax program proposes tax rate of Php 10 per liter of
volume capacity for SSBs containing purely locally produced sugar and Php 20 per liter of
volume for others, with adjustment every three years for cumulative inflation.

The products covered by the SSB tax are sweetened juice drinks, sweetened tea and
coffee, carbonated beverages with added sugar, flavored water, energy drinks, sports drinks,
powdered drinks not classified as milk, juice, tea or coffee, cereal and other grain beverages,
and other non-alcoholic beverages that contain added sugar.

The DOF estimates revenue gain from the introduction of this tax to be equal to PhP
47 billion per year.

IV. Overall Impact of the Tax Reform

The TRAIN is expected to result to a high-end revenue impact in 2018, according to a

study conducted by the Department of Finance. The lower personal income tax rate is
expected to produce loss of 137 billion, estate and donor tax at Php 3.1 billion, but is
compensated by the VAT base expansion producing gain of Php 89.3 billion, automobile
excise with a gain of Php 24 billion, Petroleum excise with a gain of Php 74.4 billion, tax
administration measures gaining Php 43.8 billion, and complementary measures yielding gain
of Php 65.8 billion. Thus, the overall impact of the tax reform is expected at a net gain
amounting to Php 157.2 billion for 2018 alone.

Thus, for Fiipino compensation income earners, the gains derived from the lower
income tax rate is said to be more than enough to offset additional expenses from higher oil
prices, car loan payments and inflation.
 The 40% of the first year incremental revenue from oil will be earmarked to mitigating
measures such as the targeted cash transfers and PUV modernization, and the rest will be
allocated to investment, education, health and social protection.

V. Conclusion

The Tax Reform for Acceleration and Inclusion is a commendable program of the
current administration as it aims to replace the long antiquated tax system of the Philippines
which has not been adjusted to inflation. It seeks to improve the fairness, efficiency and
simplicity of the tax system while at the same time protecting the revenue intake of the
government. The tax reform package may be a mix of revenue increasing and decreasing
measures, but the net impact would produce gain for the government, thus sustainable and
comprehensive growth is ensured.

Thus, with the humungous impact of the tax reform program, Filipinos are looking
forward to feel the relief of lower income tax rate and the “positive change” that the tax
reform has claimed to bring.

References

 Manasan, Rosario, August 2017,Assessment of the 2017 Tax Reform for Acceleration and
Inclusion (DISCUSSION PAPER SERIES NO. 2017-27, Retrieved from the Philippine Institute for
Development Studies website: https://pidswebs.pids.gov.ph/CDN/PUBLICATIONS/
pidsdps1727_rev.pdf

 Tax Reform Now, retrieved from http://www.dof.gov.ph/taxreform/

 An Act Amending Sections 5, 6, 24, 25, 31, 34, 35, 51, 79, 84, 86, 89, 90, 97, 99, 100, 101, 106,
107, 108, 109, 112, 114, 116, 148, 149, 150, 151, 155, 171, 196, 232, 237, 249, 264, AND 288;
Creating New Sections 148-A, 150-A, 237-A, 264-A, 264-B, AND 265-A; Creating New All Under
Republic Act. No. 8424, Otherwise Known as the National Internal Revenue Code of 1997, as
amended, and for Other Purposes, SB 1592, 17th Congress (2017).