In recent weeks, various news articles came out about the Senate’s approval of the first package of the Tax Reform for Acceleration and Inclusion, or TRAIN, under Senate Bill (SB) No. 1592. While these articles kept the people abreast of the developments, they failed to mention that the Senate bill is still subject to a series of debates and amendments that will undergo a second and a third reading. Only then will it be given the Senate’s final approval.
To resolve conflicting provisions, a meeting of the bicameral conference committee of both the Lower and Upper Houses will be called. Once the conference committee reaches an agreement, the conference report, as approved by both Houses, will constitute the enrolled bill for the President’s signature.
But let’s focus on what the Senate did approve: Its version has many provisions that conflict with House Bill (HB) 5636, namely:
For compensation income earners, the exempt income in SB 1592 was reduced to P150,000 from the P250,000 threshold under HB 5636. While the thresholds for income brackets were lowered, thus, effectively yielding a bigger tax revenue for the government due to the higher tax rates imposed, curiously enough, income earners who bring in more than P5.5 million will pay less tax under the SB compared to the HB. In addition, the SB will automatically adjust the income tax schedule beginning 2021, contrary to further reductions under the HB by 2021, and after 2022, the taxable income levels and base in this version will be adjusted every three years.
Where the HB opted to do away with personal and additional exemptions, the SB only removed the former, with the additional exemption automatically being adjusted upward beginning 2021. Nonetheless, the Lower House proposed that the non-taxable bonus be increased to P100,000, whereas SB 1592 maintains the existing exemption of P82,000.
Under the provision of the SB, self-employed individuals, professionals, and mixed income earners have the option to be subject to 8 percent on the amount in excess of P150,000 of the total gross sales or receipts and other non-operating income, or be taxed the same way as compensation income earners. The three-year irrevocable election of tax should be signified in the tax return, or else he will be taxed similar to a compensation income earner. For the same taxpayers under the HB, if the gross sales or receipts are below the proposed P3 million VAT threshold, the HB levies 8 percent income tax in lieu of percentage tax, while those whose gross sales or receipts exceed P3 million will be taxed the same way as corporations.
While fringe benefit tax (FBT) will be gradually phased out under the HB, the SB retained the FBT provisions.
In lieu of the 15 percent preferential tax rates, both Houses propose to subject aliens employed by ROHQs/RHQs, OBUs, and petroleum service contractors and subcontractors to the same rates as compensation income earners starting 2018, with the exception of those already entitled to the 15 percent preferential tax rate prior to 2018 under the SB.
Meanwhile, we see an increase in taxes on passive income under the SB, since final withholding taxes increased from 10 percent to 20 percent for cash and/or property dividends received by individuals; from 7.5 percent to 20 percent for interest derived from foreign-currency bank accounts; from 5 percent/10 percent capital gains tax to a flat rate of 20 percent for the capital gains from the sale of stocks of domestic corporation not listed on the local stock exchange.
For estate tax, the similarity in both bills starts and ends in the provision to replace the graduated estate tax rates with a fixed rate of 6 percent based on net estate. In determining the value of the net estate subject to tax, the SB removes all allowable deductions, except for the standard deduction, which is raised to P5 million, and the retirement benefit received under RA No. 4917. The SB added the exemption of current market value of up to 3 hectares of family farm. In contrast, the HB increased the family home exemption ceiling to P3 million. In addition, the HB removed some allowable deductions for nonresident estates.
The SB and HB both scrapped the graduated donor’s tax rates and set the same to a flat rate of 6 percent with no deductions. One interesting matter the SB added is that the transfer for less than adequate consideration will be viewed as made for an adequate and full consideration if the transfer of property is made in the ordinary course of business (bona fide, at arm’s length, and free from any donative intent), thus removing the presumption of donation on every transfer for less than adequate consideration.
Many revisions are proposed for VAT with regard to the zero-rating, exempt, and refund system. Both bills are in agreement and made clarifications on zero-rated sales to entities engaged in international shipping or international airport operations, which only cover those rendered exclusively for international shipping or air transport operations. The two bills also clarified that the transport of passengers and cargo by domestic air or sea vessels from the Philippines to a foreign country qualifies as a zero-rated transaction. The two bills are in agreement in excluding some sales of goods and services from VAT zero-rating upon the creation of an enhanced VAT refund system starting 2018—actual action of BIR within 90 days from the taxpayer’s filing of claim of input VAT refund.
Significant changes are being proposed under both bills for excise tax. For manufactured oils, the proposition by the Senate does not impose excise tax on leaded premium gasoline. In comparing the rates, the Lower House levies about P1 to P3, and P1 to P5 more tax on manufactured oils in 2018 and 2019, respectively, compared with that in the SB. For 2020, most petroleum products will have the same excise tax rates, while the rest will have bigger tax under the HB at P3 to P6. For excise tax on automobiles, on the other hand, the recommendation of SB is only for 2018, unlike that of the HB, which is for 2018 and 2019. For sweetened beverages, the Senate aims to introduce different types of sweetened beverages to excise tax—from a low of P3 per liter to a high of P10 starting 2018, although exempting those using purely coconut sap sugar or steviol glycosides.
Only the SB recommends an increase in excise tax on coal and coke to P20, and places 20 percent excise tax on cosmetic procedures performed for aesthetic reasons.
We have yet to see the harmonized version of the tax reform bill from both houses, targeted for the President’s signature by mid-December this year. Still, we hope that in the process, our elected lawmakers will take into consideration what is right and just, and what will be good for the Filipino people in general and not just an elite few. Needless to say, we hope and pray that the taxes that will be gained from these revisions will be fully utilized to help our country move forward.
The author is a senior manager with the Tax & Corporate Services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd. – a member firm of Deloitte Touche Tohmatsu Limited – comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.