Some 6 Million or 83% of Filipinos Exempted from Personal Income Tax Under TRAIN

Some 6 million Filipinos earning P250,000 and below who comprise 83 percent of the base for individual taxpayers will no longer pay the personal income tax (PIT) under the proposed Tax Reform for Acceleration and Inclusion Act (TRAIN) that was approved last week by the House of Representatives.

Of this number, some 28 percent or 2 million are minimum-wage earners, who are already exempted from the PIT, and 55 percent or 4 million more are those earning above the minimum pay but not over P250,000 per year.

These are preliminary estimates as the Department of Finance (DOF) is still getting final data from the Bureau of Internal Revenue (BIR) and recomputing actual revenue take based on the TRAIN bill approved by the House last May 31.

This means compensation earners with a monthly income of P21,000 and below will pay zero income tax once the tax reform package is enacted by the Congress and becomes a law.

TRAIN or House Bill 5636, the first package of the Duterte administration’s Comprehensive Tax Reform Program (CTRP), was approved by the House of Representatives by a 246-9 vote with one abstention last May 31 before the Congress’ sine die adjournment. This bill, which had consolidated the DOF’s original proposal—HB 4774—with 54 other tax-related measures, seeks to make the country’s tax system simpler, fairer and more efficient by slashing personal income tax rates and, to fill up the consequent revenue loss, by adjusting excise taxes on certain products and broadening the Value Added Tax (VAT) base.

It is now the turn of the Senate to tackle this tax reform package when both chambers of the Congress reopen for their Second Regular Session on July 24. Under the Constitution, all tax and appropriation measures must originate from the House, which will then refer its approved bills to the Senate.

Among the key features of the House-approved TRAIN are the following:

On lowering the PIT in its first year of implementation:

· Those with net taxable income (NTI) of P250,000 and below are exempted from PIT;

· Taxpayers with NTI of P250,000-P400,000 will pay 20 percent of the excess of P250,000;

· NTI of over P400,000-P800,000 will pay P30,000 + 25 percent of the excess of P400,000;

· NTI of over P800,000-P2 million will pay P130,000 + 30 percent of the excess of P800,000;

· NTI of over P2 million-P5 million will pay P490,000 + 32 percent in excess of P2 million; and

· NTI of over P5 million will pay P1,450,000 + 35 percent in excess of P5 million On the estate tax:

· A flat rate of 6 percent regardless of the value of the net estate.

On the donor tax:

· A flat 6 percent in excess of P100,000, regardless of whether the donee is a family member/relative or a stranger.

On sugar-sweetened beverages:

· P10 per liter for beverages containing purely locally produced sugar;

· P20 pesos for all other sweetened beverages;

· These rates shall be adjusted once every 3 years after considering the 3-year cumulative inflation rate; and

· Exemptions include plain milk and milk drink products without added sugar, infant formula, 100% fruit or vegetable juice, meal replacement and medically indicated beverages, ground coffee, unsweetened tea

On the automobile excise tax in the first year of implementation:

· Automobiles with a net manufacturer’s price/importer’s selling price of P600,000 will be charged a 3 percent tax;

· Over P600,000 to P1.1 million will be charged P18,000 + 30 percent of the excess of P600,000;

· Over P1.1 million to P2.1 million will be charged P168,000 + 50 percent of the value in excess of P1.1 million;

· Over P2.1 million to P3.1 million will be charged P668,000 + 80 percent of the value in excess of P2.1 million; and

· Over P3.1 million will be charged P1,468,000 + 90 percent of the value in excess of P3.1 million

On excise taxes on petroleum products:

Staggered excise tax increase of P3 per liter in the first year, P2 in the second year and P1 in the third year for the following:

· Diesel and essentials: processed gas, kerosene, diesel fuel oil, LPG, bunker fuel oil

· Gas and non-essentials: lubricating oils and greases, naptha, regular gasoline, premium gasoline, aviation turbo jet fuel

· Exempted are the following: for HB5636, naphtha and LPG when used as a raw material in the production of petrochemical products.

· When the price per barrel of Dubai crude oil in the global market reaches $80 or more the excise tax adjustment will be suspended but not decreased.

As for the VAT, HB 5636 lifted the exemptions specified in special laws, but retained the zero-VAT privileges of senior citizens, persons with disabilities and cooperatives.

Raw food, education and health will remain exempted.

However, as recommended by the DOF, the bill provides for tax administration reforms in the implementation of this tax privilege for cooperatives to plug leakages costing an estimated P6 billion per year in this sector alone.

To help counter the potential revenue loss, Finance Undersecretary Karl Kendrick Chua said the House agreed to the DOF proposals to

1) tighten the definition of cooperatives;

2) allow automatic audit of coops without the need for prior permission from the Cooperatives Development Authority (CDA), and,

3) inclusion of coops in the Tax Incentives Management and Transparency Act (TIMTA) as a way to monitor the implementation of the tax incentives and stop leakages

Chua also made it clear that under the TRAIN bill, the lease of apartment, condo and other residential units with a monthly rental not exceeding P10,000 shall remain exempt from VAT provided that the gross receipts of the lessor is below the VAT threshold of 3 million pesos.

Chua said the DOF hopes that the original features of the TRAIN bill, outlined in House Bill 4774 that was authored by Rep. Dakila Carlo Cua, would be retained when the Senate deliberates on the measure after the Congress opens its second regular session in Chua said the DOF is now recomputing the net revenue take from the House-approved HB 5636 based on the final version approved by the House last May 31.

HB 5636 was passed after President Duterte had certified the bill as urgent, given that it was designed to help provide a steady revenue stream to his government’s ambitious high—and inclusive—growth agenda anchored on record spending on infrastructure, human capital and social protection for the poor and other vulnerable sectors.

In his letter to Senate President Aquilino Pimentel III and Speaker Pantaleon Alvarez, President Duterte said, “The benefits to be derived from this tax reform measure will sustainably finance the Government’s envisioned massive investments in infrastructure thereby encouraging economic activity and job creation, as well as fund the desired increase in the public budget for health, education and social programs to alleviate poverty.”

Finance Secretary Carlos Dominguez III, who had earlier asked the President to certify the tax reform bill as urgent, said in his memorandum to the Chief Executive that this TRAIN bill is “expected to help reduce poverty rate from 21.6 percent in 2015 to 14 percent in 2022, lifting some six million Filipinos out of poverty, and helping the country achieve upper middle-income country status where per capita gross national income increases from $3,500 in 2015 to at least $4,100 by 2022.”

In the same memo, Dominguez told Mr. Duterte of the “dire consequences” of the Congress’ failure to write a tax reform law.

“The government’s strategy to embark on an aggressive expenditure program by raising deficit spending to three percent of the Gross Domestic Product (GDP) would lead to an “unsustainable fiscal position,” which, in turn, could trigger a credit rating downgrade possibly costing the government an extra P30 billion in annual debt servicing and P100 billion more in higher borrowing costs for the public.,” he said.

Financial institutions have welcomed the House approval of the tax reform bill. Deutsche Bank said that “Beyond its fundamental economic benefits, [the tax reform bill’s] passage would send investors a strong signal that the administration has the political will to pass unpopular laws to institute long-term structural economic reforms.”

Nomura said “the timeliness of the vote and the decisive result again underscore the strong priority that Duterte places on the economic reform agenda and his strong control over Congress.” “Apart from the revenue impact from these measures, there are benefits from tax administration reforms to expand the tax base, including the VAT changes,” it added.

In a sign of positive business sentiment for this tax reform package, the Philippine Stock Exchange went up by 90.37 points or 1.15 percent to close at 7,927.49 last June 1, or the day after the House had approved HB 5636 on third and final reading. (DOF)