INSIGHT: Philippines Tax Reform Continues in 2019

The first package of the Tax Reform for Acceleration and Inclusion (“TRAIN”), or Republic Act No. 10963, was enacted into law in December 2017 and became effective on January 1, 2018.

The TRAIN introduced amendments to personal income taxation, transfer taxes, value-added tax, excise tax, taxation of sale of shares of stocks, and documentary stamp tax, among others.

The Philippine Bureau of Internal Revenue has issued implementing rules and regulations and advisories to provide details on and clarify the implementation of the changes introduced under the TRAIN.

The second package of the TRAIN (“TRAIN 2") has also been submitted to Congress. TRAIN 2 seeks the reduction of the corporate income tax. Relative to the ASEAN region, the Philippines has the highest corporate income tax at 30 percent.

TRAIN 2 also proposes to modify and limit the fiscal incentives granted to certain businesses. Currently, the tax incentives are enjoyed perpetually and are applied in lieu of all other taxes. Under TRAIN 2, the government wants to make the fiscal incentives transparent, targeted, performance-based, and time-bound. TRAIN 2 also seeks to repeal the special laws on investment tax incentives and provide for a single omnibus incentives law. TRAIN 2 is expected to take effect in 2019.

A tax amnesty is also being proposed and is expected to accompany the tax reform program, with a view to further enhancing revenue collection. The current tax amnesty bill proposed by the Department of Finance covers both estate tax and a general tax amnesty. It also proposes a tax amnesty on delinquencies or final assessments.

Recent Developments

Personal Income Tax

Prior to the enactment of the TRAIN law, an individual employee or self-employed taxpayer was taxed at graduated rates ranging from 5 percent to 32 percent, depending on the taxpayer’s income bracket. Under the TRAIN, an individual with a taxable income of 250,000 peso or less is exempt from income tax. Those with a taxable income above 250,000 peso are subject to the graduated rates of 20 percent to 35 percent effective 2018, and 15 percent to 35 percent effective 2023. The top income tax bracket is 8 million peso.

Further, under the TRAIN, self-employed individuals and/or professionals, whose gross sales or receipts do not exceed 3 million peso have the option to avail of an 8 percent tax on gross sales or gross receipts in excess of 250,000 peso, in lieu of the graduated income tax rates.

Transfer Tax

The TRAIN also amended the transfer tax rates.

Under the old law, the estate tax rates ranged from 5 percent to 20 percent of the net estate. The TRAIN reduced the estate tax to a single rate of 6 percent of the net estate.

The donor’s tax rate was also reduced to a single rate of 6 percent , regardless of the relationship between the donor and the donee. Under the old law, the donor’s tax rates ranged from 2 percent to 15 percent if the donor and donee are related within the fourth degree of consanguinity. In case of a donation to a stranger, the applicable donor’s tax rate was 30 percent.

Value Added Tax

The TRAIN also broadened the tax base for the imposition of Value Added Tax (“VAT”). It limited the definition of “export sales” and “export services” that enjoy VAT zero-rating. The TRAIN also limited the coverage of VAT exemptions.

In conjunction with the foregoing amendment to the VAT law, the TRAIN also provided for the implementation of an enhanced VAT refund system that will provide timely cash refunds of unutilized input VAT.

The TRAIN also increased the threshold for the imposition of VAT from 1,919,500 peso to 3 million peso.

Other Taxes

The TRAIN imposed higher excise taxes on cigarettes, manufactured oils, mineral products, and automobiles. It also increased taxes on some passive incomes, including interest income from dollar and other foreign currency deposits. The TRAIN also increased the tax imposed on sale of shares of stocks. Under the TRAIN, the stamp duty on taxable documents have also been increased.

The TRAIN also introduced new taxes in the form of excise tax on sweetened beverages and non-essential services.

Outlook for 2019

The tax reform program is set to continue through 2019.

TRAIN 2

TRAIN 2 is expected to take effect in 2019.

There are two main bills that cover the second package of the TRAIN, both of which seek the reduction of the corporate income tax rate of 30 percent.

House Bill 7458 proposes an automatic reduction in the corporate income tax rate by 1 percent every year beginning 2019 until it reaches 20 percent by 2028.

House Bill 7214, on the other hand, proposes a conditional reduction in the corporate income tax rate, beginning January 1, 2020, by 1 percentage point for every 0.15 percent of GDP reduction in the cost of granting tax incentives to business investments, two years prior to the effectivity of the new rate. The goal of House Bill 7214 is to reduce the corporate income tax rate to 25 percent by 2022.

TRAIN 2 also seeks to rationalize the fiscal incentives granted to certain businesses and improve the governance of such incentives. Currently, the tax incentives are enjoyed perpetually and are applied in lieu of all other taxes. The government aims to limit these tax incentives. It wants to make the fiscal incentives transparent, targeted, performance-based and time-bound. Under TRAIN 2, it is proposed to limit the fiscal incentives of qualified registered enterprises to:

(i) income tax-based incentives; and

(ii) customs duty incentives; preferential VAT treatment is excluded.

The government believes that VAT exemptions should not be granted as investments incentives. It is also proposed grant tax incentives only to new investment/activities; the Government believes that expansions are signs of profitability and need not be given incentives.

TRAIN 2 also seeks to repeal the special laws on investment tax incentives and provide for a single omnibus incentives law. Currently, the Philippines has 123 laws that grant investment incentives and 192 laws that grant non-investment incentives.

It also aims to repeal the exemptions granted to, among other, government owned and controlled corporations, proprietary educational institutions and hospitals.

The draft bill for TRAIN 2 introduces amendments to the general anti-avoidance rules. It proposes to amend section 50 of the National Internal Revenue Codewhich gives the Commissioner of Internal Revenue the authority to distribute, apportion, allocate, and impute income and deductions to disregard and counteract tax avoidance arrangements. Generally, there is “tax avoidance,” where the transaction or arrangement is motivated by obtaining tax benefit or advantage with no commercial reality or economic effect and the use of the provisions of the taxation law on such transaction or arrangement would not have been the intention of the law.

Tax Amnesty

A tax amnesty is also being proposed. Under the bill, the grant of tax amnesty shall cover estate tax and all other national internal revenue taxes under a General Tax Amnesty.

The Estate Tax Amnesty would require payment of the estate tax amnesty tax at the rate of six percent imposed on the deceased’s undeclared estate. It applies to estate taxes due for taxable year 2017 and prior years.

The General Tax Amnesty, on the other hand, would cover all national internal revenue taxes, excluding VAT and estate tax, for taxable year 2016 and prior years. Similar to the tax amnesty granted by the Government in the past, the availment thereof would require the filing of a notice and Tax Amnesty Return, accompanied by a Statement of Assets, Liabilities and Networth as of December 31, 2016.

In addition to the foregoing, the Secretary of Finance indicated a grant of amnesty on delinquencies or final assessments. The proposed amnesty tax shall be at the following rates:

(a) 50 percent of the basic tax, for delinquencies and assessments which have become final and for tax cases subject of final and executory judgment; and

(b) 80 percent of the basic tax, for those with pending criminal cases.

It is noteworthy that all tax amnesty programs in prior years specifically excluded from the coverage delinquent accounts or assessments which have become final and executory.

Planning Points

The reduction of the transfer tax rates and the proposed tax amnesty provide opportunities for restructuring; they also provide a timely break to taxpayers to consider compliance and disclosure, especially as the Philippines moves toward transparency in line with the global trend. To take advantage of these reforms, taxpayers may wish to review current structures and take steps to regularize arrangements when circumstances warrant.

Dennis Dimagiba is a Partner and Kristine Anne Mercado-Tamayo is a Senior Associate at Quisumbing Torres, Philippines