Tax Reform for Acceleration and Inclusion Law

The Tax Reform for Acceleration and Inclusion (TRAIN) Law or Republic Act No. 10963, is the initial package of the Comprehensive Tax Reform Program (CTRP) in the Philippines that was signed into law by President Rodrigo Duterte on December 19, 2017. TRAIN consists of revisions to the National Internal Revenue Code of 1997, or the Tax Code 

This reform includes packages that make changes in taxation concerning the personal income tax (PIT), estate tax, donor's tax, value added tax (VAT), documentary stamp tax (DST) and the excise tax of petroleum products, automobiles, sweetened beverages, cosmetic procedures, coal, mining and tobacco. 

The prominent feature of the tax reform is that people who earn P250,00 annually or P21,000 monthly and below are exempted from paying personal income tax (PIT). This includes minimum wage earners, who were also exempted in the former tax system. On the other hand, those earning over P250,000 have tax rates following a set PIT schedule. Essentially, greater income is taxed at higher tax rates. This denotes that low to middle income-earners get to have a higher take home pay, while high income-earners have a bigger contribution to tax revenues. Increase in consumption taxes intend to counterbalance PIT tax exemptions.

The TRAIN LAW is one of the primary ways in which the 2020 and 2040 vision of the Duterte administration is to be achieved, and so, it had optimistic projections about its effect on the economy, development and poverty alleviation in its inception.  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.

Vision and goals of TRAIN Law
The TRAIN Act aims to address the reputed weaknesses of the Tax Code, specifically through the following objectives: First, it intends to simplify the previous system to make it more straightforward and intuitive. Second, it intends to create a more “just” scheme wherein taxation is staggered and distributed on the basis of financial capability and the underprivileged are able to reap more advantages. Third, it intends to improve the efficiency by which tax is collected, particularly tackling issues of compliance. 

The changes instituted by the tax reform is expected to be able to increase revenues to finance the infrastructure, healthcare and education programs of the Duterte Administration.  This is all while expecting to reduce tax remitted by the poor and receiving a greater portion of revenues from the wealthiest in the population through personal income tax (PIT) and consumption taxes. The tax received from the latter will also subsidize, through unconditional cash transfers, the poorest 10 million households, who are not benefited by the greater take home pay amendment.

On a long-term scale, TRAIN Act is just the first from a series of tax reforms, as part of the CTSP, which will be one of the principal means by which the 2020 and 2040 vision of the incumbent administration is to be achieved. The vision in 2020 is that poverty will be reduced from 21.6% to 14%, while 2040 sees the Philippine nation as having “eradicated extreme poverty”, established “inclusive economic and political institutions where everyone has equal opportunities” and achieved “high-income country status”. This can be achieved if economic growth can be sustained by at least 7% each year and if the source of growth can be shifted to investment from consumption. This means prioritizing investments on people through "health, education, life-long training, social protection, infrastructure, and research and development" and investments on infrastructure to boost productivity.

Legislative history

House of Representatives
House Bill No. 4774 is credited as the original measure that led to the TRAIN Act. It was endorsed by the Department of Finance (DOF) to the Philippine House of Representatives in September 26, 2016 as the first package of a wider CTRP. It was filed before the legislature on January 17, 2017 by Congressman Dakila Cua of Quirino. Cua is also the chairperson of the Ways and Means Committee of the Congress which deals on taxation.

After thirteen hearings which was done within the span of four months, the House Bill No. 4774 was consolidated with 54 other tax-related bills to come up with a House Bill 5636, a substitute bill which had "moderate" changes from House Bill 4774. The substitute measure was approved on May 8. 

The DOF requested President Rodrigo Duterte to declare the bill as "urgent" on May 29, 2017. Bills passed on the second reading by the Congress but are not certified "urgent" by the president could only be voted upon after copies of the given measure is provided to House of Representatives members three days before the day of the third and final reading. On May 31, 2017 just before the 17th Congress adjourn its first regular session, the bill passed the final reading with 246 voting for and 9 against the bill. Only one made an abstention. Most of those who opposed were from the Makabayan bloc.

Senate
A version of the bill was filed in the Senate on March 2017 by Senate President Aquilino Pimentel III. By May 2017 six public hearings were conducted by the senate. The Senate had to wait for the House of Representatives version to get pass before it could start plenary discussions like other bills on budget or tax and appropriations. The Senate voted 17-1 to approve the Tax Reform Acceleration and Inclusion (TRAIN) bill, with Sen. Risa Hontiveros being the lone dissenter on Nov 28, 2017. On the succeeding voting for the TRAIN, the positive votes were cast by Senators Sonny Angara, Nancy Binay, Frank Drilon, JV Ejercito, Chiz Escudero, Win Gatchalian, Dick Gordon, Gringo Honasan, Loren Legarda, Joel Villanueva, Koko Pimentel, Grace Poe, Ralph Recto, Tito Sotto, Cynthia Villar and Migs Zubiri. The negative votes were cast by Senators Ping Lacson, Risa Hontiveros, Bam Aquino and Antonio Trillanes IV. 

Duterte's certification of the TRAIN as "urgent" allowed the bill to get passed the second reading on November 28, 2017. Within the same day, the Senate bill passed the third and final reading with 17 senators voting for the bill. Only Risa Hontiveros voted against the bill.

Bicameral Conference Committee
The Bicameral Conference Committee consolidated the bills passed by the House of Representatives and the Senate. The committee then approved a bill which favored the Senate version on December 11, 2017 and prepared a report after for ratification of both chambers of the Congress and signing of the President.

the House of Representatives and the Senate ratified the version of the bill prepared by the Bicameral Conference Committee on December 13, 2017.

Signing into law and partial veto 
President Duterte exercised his veto power to void 5 provisions of the law. The provisions vetoed were the following:

1. Reduced income tax rate of employees of Regional Headquarters (RHQs), Regional Operating Headquarters (ROHQs), Offshore Banking Units (OBUs), and Petroleum Service Contractors and Subcontractors;

2. Zero-rating of sales of goods and services to separate customs territory and tourism enterprise zones;

3. Exemption from percentage tax of gross sales/receipts not exceeding five hundred thousand pesos (P500,000.00);

4. Exemption of various petroleum products from excise tax when used as input, feedstock, or as raw material in the manufacturing of petrochemical products, or in the refining of petroleum products, or as replacement fuel for natural gas fired combined cycle power plants; and

5. Earmarking of incremental tobacco taxes.

Summary of amendments 
These were the revisions made to the Tax Code :

Complementary measures 
There are four (4) complementary measures undertaken to ensure the income from the TRAIN Law will be properly allocated for the development of the Philippines as a nation. These are the Tax Administration, Ear Making, Infrastructure Projects, and Social Programs.

Tax Administration 
Steps to modernize and refine the tax administration processes are undertaken to support the changes in tax policy so as to improve security against tax crimes and to ensure taxpayer compliance. On top of improving electronic systems (e.g. eBIR forms, Electronic Filing and Payment System, mobile payments) the following reforms are implemented
 Mandatory fuel marking
 Provision for use of electronic receipts
 Connection of cash registers and point of sale machines to BIR servers for real time reporting of sales and purchase data
 Relaxation of bank secrecy laws and automatic exchange of information to allow for more effective prosecution of criminal cases

Ear Marking 
For 5 years from the law's enactment, all revenues will be set aside for infrastructure and social programs only, with a 70% and 30% portion respectively.

Infrastructure Projects 
Infrastructure projects that will receive priority funding include the Build, Build, Build Program that tackles the problem of congestion through the construction of public transport systems and road networks and the refurbishing and enhancing of military facilities. Additionally, part of the 70% will be allocated to the building of sports facilities in public schools as well as amenities that will allow access to potable water in public spaces.

Social Programs 
The social programs that will receive priority funding from 30% of revenues include:

Programs for sugar farmers to increase productivity, provide livelihood opportunities, develop alternative farming systems, and enhance farmer's income
Social mitigating measures and investments in education, health, social protection, employment, and housing for poor and near-poor households
Unconditional cash transfer to the poorest 10 million households
Social benefits card to determine qualified beneficiaries (fuel vouchers for PUJs, fare discount for all public utility vehicles, discounted purchase of NFA rice, free skills training under TESDA)

Unconditional cash transfers (UCT) 
In order to provide provisional protection for vulnerable households from the initial shock of the TRAIN Law, unconditional cash transfers are dispensed. On the first year, beneficiaries receive Php200 per month. In the succeeding 2 years, they receive P300 per month. The UCT is obtained from oil excise tax revenues. In addition to the UCT, social welfare cards are provided to aid in continuous conferring of benefits and subsidies to the poorest households. This includes subsidies for "medicine, transportation, rice, and vocational trainings".

Key Provisions

Package One  
The overarching goal of the first package of the TRAIN is to "create a simpler, fair, and more efficient system". Through this program, the richer tax payers of the Philippines will pay a greater contribution to enable the government to execute its programs and services targeted to the general improvement of the country, especially the less fortunate. There are six (6) main key provisions, three (3) additional excise taxes, and four (4) financial taxes.

Lowering the Personal Income Tax (PIT) 
"The TRAIN lowers the Personal Income Tax (PIT)for all taxpayers except the rich". Effectively, personal taxes will be reduced for 99% of the Philippine tax payers. 

The new PIT is summarized in the table below

Additionally, Minimum wage earners are still exempted from PIT. The Law also ensures a minimum wage earner who incurs a small raise will not have his overall salary (with the PIT deducted) less than minimum wage. Also, married couples where both parties are working may be exempted up to a total of P500,000. This does not include the exemption from the first P90,000 of their thirteenth month pay and additional bonuses. Finally, Self-employed and professionals with gross sales below VAT can only pay 8% flat tax instead of their income and personal tax.

Simplifying Estate and Donor's Tax 
The TRAIN aims to simplify property purchases, transfers and donations in order to make the land market more efficient thus ensuring the usage of properties is maximized. 

The Estate Tax is now reduced to 6% based on the net value of the property. It also has a standard deduction of P5 million as well as a P10 million exemption on the family home. 
The Donor Tax is also reduced to 6% of the net donations for gifts above P250,000 yearly.

Simplified Value Added Tax (VAT) system 
The government's aim to elevate the less fortunate in the Philippines and drive development is exemplified as the TRAIN repeals 54 out of 61 of the non-essential VAT exemption. In order to protect these less fortunate persons, as well as small and micro businesses, they are exempted from tax on goods and services of marginal establishments. VAT exempt tax payers now have the option to
 PIT schedule with 40% OSD on gross receipts or gross sales plus 3% percentage tax
 PIT schedule with itemized deductions plus 3% percentage tax, or
 Flat tax of 8% on gross sales or gross revenues in lieu of percentage tax and personal income tax.

"TRAIN aims to clean up the VAT system to make it fairer and simpler and lower the cost of compliance for both the taxpayers and tax administrators". As such, VAT exemptions are now only limited to health, education and raw agriculture food. In 2019, medicines for hypertension, high cholesterol and diabetes will be exempted from VAT. Similarly, purchases from senior citizens and persons with disabilities. Housing that costs less than P2 million shall also be exempted starting in 2021.

Increasing the Excise Tax of Petroleum Products 
This tax aims to increase efforts towards decreasing the consumption of harmful fuel, and veering towards a healthier, more sustainable future. The price of fuel also varies due to the global inflation of oil.
Listed below is the effect of the Petroleum Excise Tax (note: the additional excise tax is per liter)

Listed below are the new excise taxes for specific fuel products for the year 2018

Increasing the Excise Tax of Automobiles 
The table below summarizes the excise taxes on automobiles. The second column illustrates the tax rate on vehicles based on their specific price range. The third column portrays the actual average effective tax rate. Because the TRAIN law increases the PIT of 99% of the population, their increase in net income will still be more than enough to compensate for the effects of the excise tax on automobiles. This means they still benefit from the TRAIN as they incur additional disposable income in the end. In addition, because richer tax payers tend to purchase more cars, the additional revenue from this tax will mostly come from them.

Excise Tax on Sweetened Beverages 
"The SSB (Sugar-Sweetened Beverages) tax will promote a healthier Philippines". It achieves this by reducing the increasing number of diabetes and obesity cases, through raising awareness, promoting the consumption of healthier products and encourage companies to innovate healthier alternatives.

The new tax imposes P6 per liter on drinks containing sweeteners and P12 per liter on drinks containing high-fructose corn syrup. Milk, 100% natural juice and 3-in-1 coffee drinks are exempt from the excise tax.

Additional Excise Taxes 
There are three additional excise taxes, namely on Coal, Cosmetics and Tobacco.

Coal Excise Tax 
Coal is a cheap source for power generation and has its uses in multiple industries such as the chemical and pharmaceutical industries. It is also a prime ingredient for activated carbon, carbon fibre and silicon metal. However, it remains a major source for air pollution in the Philippines. The aim of the excise tax is to shift towards renewable energies and generate additional income for building infrastructures and social services. 
The excise tax on coal will increase from its original P10/Metric Ton(MT) to P50/MT on both domestic and imported coal. P50/MT will be added each succeeding year until  January when the rate would have reached P150/MT.

Cosmetics Tax 
Starting 2018, all cosmetic surgeries, aesthetic procedures, and body enhancements intended to improve, alter, or enhance a person's appearance are now subject to a tax of 5%.
However, procedures necessary to ameliorate a deformity arising from, or directly related to a congenital or developmental defect or abnormality, a personal injury resulting to an accident or trauma, or disfiguring disease, tumor, virus or infection are tax-exempted.

Tobacco Tax 
The excise tax on cigarettes aims to reduce the amount of smokers and respiratory and cardiovascular diseases one can catch from the act, as well as generate additional revenue for health oriented programs and services. 
From its original excise tax of P30.00 in 2017, the tax on tobacco increased to P32.50 on January 01 2018, P35.00 on July 01 2018, will increase to P37.50 on January 01 2020, and P40.00 on January 01 2020. Afterwards, it will increase annually by 4% from January 01 2024.

Financial Taxes 
There are four taxes that were adjusted along with the TRAIN Law. Firstly, Documentary stamp tax increased by 100% except on loans with only 50% increase, but not for savings, property, and non-life insurance. Secondly, Foreign currency deposit unit (FCDU), the final tax increased from 7.5% to 15% on the interest income. Thirdly, Capital gains of non-traded stock increased from 5% to 10% final tax on net gains. Finally, Stock transaction tax'stransaction value increased from 0.5% to 0.6%.

Others 
Finally, there are three additional taxes that do not fall under the aforementioned categories. These are the Tax on lotto winnings and PCSO prizes, Documentary Stamp Tax, and Mining Tax. With the implementation of the TRAIN Law, all PCSO lotto prizes are taxed at 20% if the prize exceeds Php10,000. The documentary stamp tax has been doubled, resulting in stamp taxes ranging from Php1.50 to Php3.00. Finally, excise tax rates on all non-metallic minerals and quarry resources, and all metallic minerals including copper, gold and chromite, will be doubled, from 2% to 4%, ss well as excise tax on indigenous petroleum, which will be doubled from 3% to 6%.

Effect of TRAIN Law 
The three main categories the TRAIN Law affects with its first package are Growth in the Economy, Employment Generation, and Effect on Inflation. The  DOF projects the economy to grow by 1.3% by 2022 with a 0.42% inflation due to the excise tax increase (this is still within the 2-4% target inflation by the Bangko Sentral ng Pilipinas (BSP); it also predicts to create half a million jobs over the next ten years, and eight million over the entirety of its life, as well as lift 250,000 Filipinos out of poverty. Through the increase in excise tax, Package 1 will be able to generate Php134 Billion. The actual effects in 2018 are elaborated below.

Growth and Economy 
For the first quarter of 2018, the government was able to raise Php619.84 billion. This represents a 16.4% growth in revenue compared to the first quarter of 2017. In monetary terms, the government was able to raise Php87.44 billion more in this quarter of 2018 compared to the previous year. "The Philippine economy expanded by 6.8 percent in the first quarter of 2018, making it still one of the fastest-growing economies in the region even as rising inflation reduced consumption and productivity in some sectors." DOF Secretary Carlos Dominguez III claimed tax revenues grew by 18.2%, "exceeding the 9.7 percent nominal gross domestic product (GDP) growth."

Departments that saw immediate benefits from Package 1 include the Bureau of Internal Revenue and Bureau of Customs, both with a 14.2% and 24.7% increase in revenue. This translates to a total of Php423.1 billion and Php129.8 for both departments respectively. Other government departments were able to expand their investment and growths during the first quarter as well due to the increase in income.

Insofar as expenditures go for the first quarter of 2018, the total amounted to Php782.0 billion, growing by 27.1%, which also outstripped the 9.7% nominal GDP growth due to the estimated 40.0% increase in capital outlays. Dominquez also said that the expenditure effort also rose by 2.73%, which is the highest increase since 2003. This results in a larger contribution towards GDP growth. As such, revenue effort grew by 0.91%. In addition, public construction expanded by 25.1%, thus boosting GDP growth by 0.4%. On the other hand, government consumption increased by 13.6%, contributing an incremental 1.4% to the growth of the GDP."'Strong macroeconomic fundamentals backed by tax reforms and the Build, build, build program will continue to boost economic growth to the optimum 7-8 percent level as the competitiveness of the economy rises and more jobs are created,' he said."

Inflation 
The inflation rate in June—which exceeded both government and market expectations—was the fastest pace in at least five years. Year-to-date, inflation averaged 4.3 percent, above the BSP’s 2-4 percent target range. It peaked at 5.2 percent for the same month. For the previous months, inflation was pegged at 4.6 percent and in the same period in 2017, 2.5 percent.

This was primarily due to the higher annual rate posted in the heavily weighted food and non-alcoholic beverages index at 6.1%. The country's food index went up by 5.8% in June 2018. It was 5.5% in the previous month and 3.1% in June 2017. The following annual mark-ups were also observed for the following food groups
 Rice (4.7%)
 Corn (14.1%)
 Other Cereals, Flour, Cereal Preparation, Bread,  Pasta and Other Bakery Products (2.4%);
 Meat (5.0%);
 Vegetables (8.6%);
 Sugar, Jam, Honey, Chocolate and Confectionery (3.9%); and
 Food Products not Elsewhere Classified (3.1%).
As for the rest of the food groups, they either slowed down or remained at their previous month's rate.

Socioeconomic Planning Secretary Ernesto Pernia claims that the inflation will most likely peak on the third quarter of the year and start tapering off by October.

Reception 
The TRAIN Law finally took effect in January 2018. Since its implementation, there have been numerous individuals for and against the new tax reform, such as Budget Secretary Benjamin Diokno who has expressed support for the law as the additional revenues provide funds for government initiatives. Notable government figures in opposition of the current law, that is they are calling for amendments or suspensions to specific excise tax increases or to the law as a whole, include Sen. Risa Hontiveros, Sen. Bam Aquino and Sen. Grace Poe. Ultimately, President Duterte stated on June 02 2018 "Well the law was enacted by Congress. I leave it to Congress to decide whether or not to amend, suspend or modify the law. Leave it to Congress", in a press briefing.

Support and opposition

Support
The senators who voted for the bill were Senators Sonny Angara, Nancy Binay, Frank Drilon, JV Ejercito, Chiz Escudero, Win Gatchalian, Dick Gordon, Gringo Honasan, Loren Legarda, Joel Villanueva, Koko Pimentel, Grace Poe, Ralph Recto, Tito Sotto, Cynthia Villar and Migs Zubiri.

Appeal to foreign investors
One of the goals of the TRAIN law is to make the economic environment of the Philippines more appealing to foreign investors. The reforms being implemented by the Duterte administration have been recognized and lauded by international institutions, leading to strong investor confidence and better growth prospects for the economy. This is also being pushed forward by the Department of Finance by submitting its proposal for Package 2 of its tax reform program to congress which aims to reduce corporate income tax rates and rationalize fiscal incentives.

View from an economic stand point
According to the DOF's chief economist, Gil Beltran, the moderate rise in inflation is only temporary and remains manageable under a robust economy even with the implementation of the TRAIN law. It will be remedied by the increased spending on infrastructure and social services to keep inflation in check in the future which was what the president was hoping to achieve with the implementation of this law. The train law is seen as a long-term measure that would hope to push the economy to a much higher development path, create more jobs and improve the living conditions for our people. However this comes with the rising of inflation which would be mitigated by lower income tax rates and implementing cash transfers for the short-term, and; the health, education, social protection, and infrastructure programs in the medium- and long-term.

Opposition

Burden to the Poor
One of the recurring problems that is being discussed when it comes to the TRAIN law is the burden that it will impose to the poor. As crafted, the TRAIN promises to let marginal earners and minimum salaried workers of smaller tax or even tax exemption. But critics are quick to point out that the alleged windfall of tax-free income will be blown away when basic commodities that the marginalized sector of society traditionally buy and consume every day will now be sporting increased price tags that are out of reach and beyond the imagination of poor families.

Macabayan Bloc
There were objections made by the Macabayan Bloc, a leftist group who filed a petition for a temporary restraining order (TRO) against the law. The petition is anchored on the argument that the tax law bill was invalid because there was no quorum when the House of Representatives ratified the joint bicameral conference report on the measure, and there was no voting involved. The petitioners provided links to official videos and photos that would show there was no quorum “with barely 10 people on the floor.” The petitioners also provided that another requirement was not met which was the majority vote. According to the petitioners, a vote whether viva voce or nominal, was not taken. The official video of the process shows Tinio and Zarate repeatedly objecting to the ratification, but Abu and Defensor continued with the process until the voices of the petitioners were no longer heard because the microphone had been turned off. Aside from the House rules, the petitioners said Section 16(2), Article VI of the Constitution that requires a quorum was also violated.

Call for Suspension
Three senators called for the suspension of the implementation of Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion (Train) law as consumers and transport groups complained of soaring prices of commodities. These were on the grounds that the law was not beneficial to the majority of Filipinos, due to the increase in prices of oil products and commodities, a family has incurred an additional expense of P2,644 monthly for farmers and P3,640 for workers.

Amendments
Senator Bam Aquino wanted to pass a measure that seeks to amend the Tax Reform for Acceleration and Inclusion (TRAIN) to protect Filipinos from soaring prices. Aquino explained that the Senate's version of the TRAIN law had a safeguard that would automatically suspend fuel excise tax if the forecast rate was exceeded and this amendment was to bring that sole safeguard back. According to the senator, this was a necessary step in order to protect the future well beings of the Filipino people.

References

Category:Taxation in the Philippines