Taxation:

The TRAIN
Law in Focus
CHAPTER 13
The TRAIN Act is the first of four packages of tax reforms to the
National Internal Revenue Code of 1997, or the Tax Code, as
amended.
This package introduced changes in personal income tax (PIT),
estate tax, donor's tax, value added tax (VAT), documentary stamp
tax (DST) and the excise tax of tobacco products, petroleum
products, mineral products, automobiles, sweetened beverages,
and cosmetic procedures.

TAX REFORM FOR ACCELERATION

AND INCLUSION LAW
 Duterte Administration
The TRAIN Act is aimed to generate revenue to achieve the 2022 and 2040 vision of
the Duterte administration, namely, to eradicate extreme poverty, to create inclusive
institutions that will offer equal opportunities to all, and to achieve higher income
country status. It is also aimed at making the tax system simpler, fairer and more
efficient. Regardless, contentions about the passing of this law has been present since the
beginning and the subsequent reception by the people since its ratification has been controversial.
In the first quarter of 2018, both positive and negative outcomes have been observed. The
economy saw an increase in tax revenues, government expenditure and an incremental growth in 
GDP. On the other hand, unprecedented inflation rates that exceeded projected
calculations, has been the cause for much uproar and objections. There have been petitions to
suspend and amend the law, so as to safeguard particular sectors from soaring prices.
 Value-Added Tax (VAT)
The Philippine VAT is a consumption type VAT. This means that in determining their VAT tax
liability, firms are allowed to deduct all business purchases including purchases of capital goods from
their sales. As such, the VAT does not distort the timing of firms’ investment decisions nor does it
discriminate against capital-intensive methods of production. At the same time, it minimizes the
imposition of a tax on tax (or tax cascading) that is characteristic of the turnover tax and is, thus,
neutral with respect to production and distribution methods
The 12% VAT is levied on the gross selling price or gross value in money of VAT-able goods or
properties sold, bartered or exchanged, VAT-able services sold or exchanged or VAT-able goods
imported. As such, all goods and services may fall under any one of the following three categories
under the Philippine VAT system: (i) VAT-able; (ii) VAT-exempt; or (iii) zero-rated.
The National Internal Revenue Code (NIRC) defines “goods and
properties” that may be VAT-able to include “all tangible and
intangible objects which are capable of pecuniary estimation:

(a) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade
or business;

(b) The right or the privilege to use patent, copyright, design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like property or right;

(c) The right or the privilege to use in the Philippines any industrial, commercial or scientific
equipment;

(d) The right or the privilege to use motion picture films, tapes and discs; and

(e) Radio, television, satellite transmission and cable television time.”

 Objectives of the VAT reform
under TRAIN
The proposal to reform the value-added tax system is anchored on the need to eliminate numerous
exemptions that have significantly narrowed the VAT base which has resulted in numerous breaks in the
VAT chain, thereby making it more difficult to collect the VAT efficiently and resulted in a substantial tax
gap

For instance, the VAT-exempt treatment of cooperatives and may have provided an incentive for
corporations to restructure themselves as cooperatives in order to reduce tax liability even if such an action
is not economically efficient. Further, the study argues that the exemption for cooperatives may be
redundant as small cooperatives are already protected by the VAT threshold.
 Features of the value added tax
reform under RA 10963
Relative to the original TRAIN proposal sponsored by the Department of Finance (DOF), the success of RA
10963 in minimizing the number of exemptions from the VAT and expanding the VAT base is fairly limited.
In fact, RA 10963 added two more exemptions from the VAT,

namely:

association dues, membership fees, and other assessments and charges collected by homeowners associations
and condominium corporations;

and sale of drugs and medicines prescribed for diabetes, high cholesterol and high blood pressure
Pros and cons of TRAIN
Potential benefits:
• Higher take-home pay and therefore improved spending power, particularly for those earning P40,000 a
month or less
• Better income rate after taxes for corporations

•More efficient tax collection

• Offsetting measures said to affect the most affluent businesses and individuals will generate income that will
be used in the government’s aggressive infrastructure projects and in improving basic services, such as
housing, education, and “social protection”
 Pros and cons of TRAIN
Potential negative impact:
•Inflationary effects of higher petroleum prices that are seen to mostly affect the bottom 60% of households. The government aims to offset these
effects with a “transfer scheme” that will allocate around P30 billion from petroleum excise taxes to support the bottom sectors. This scheme has
been criticized, however, for being unsustainable – projected to last only one to four years – and a “logistical nightmare.”
• Excise taxes on sugar-sweetened drinks will burden the bottom sectors, particularly those who are already tax exempt under the current taxation
system, and therefore will not benefit from the lowered tax rates
• Higher property taxes due to higher property valuation

•Investors who are looking to benefit from PEZA (Philippine Economic Zone Authority) incentives may be discouraged by the removal or
restructuring of some of these incentives
• VAT on low-rental housing may lead to higher rental costs

• For small businesses like sari-sari stores, being taxed on gross income rather than net income (computed after expenses) can mean higher tax
payments