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Philippines – 2018 Tax Reform Law

In effect since 01 January 2018, the Tax Reform for Acceleration and Inclusion (TRAIN) bill, was approved last 31 May 2017 and then signed by President Rodrigo Duterte into Republic Act No. 10963 last 19 December 2017.

The TRAIN Law seeks to improve the Filipinos’ disposable income by reducing personal income tax for majority of its citizens. At the same time, its purpose is also to increase revenue collection by limiting VAT exemptions.

Upon signing of the landmark law, the President also instructed the Department of Finance to immediately submit to Congress , Package Two of the Comprehensive Tax Reform Program(CTRP), which aims to lower corporate income taxes and modernize fiscal incentives, to complement the expected incremental revenues of TRAIN.

Below is a summarized list of revised and brand-new taxes that are part of the TRAIN Law:

1.0 New Personal Income Tax Rates – Personal income tax rates have been lowered, while salaried  employees earning annual income of P250,000 or below have been exempted from paying income taxes.

2.0 Lower Tax Rates for Professionals – Salaried employees will benefit from the lower tax rate with the revised personal income tax table. Professionals no longer have to file and pay the percentage tax. Instead they will be charged a withholding tax of 8% flat rate on gross sales or receipts. Self-employed professionals can expect to pay lower taxes as those earning an annual income of PHP3 million and below may choose to pay the 8% flat tax or follow the personal income tax table.

3.0 Tax on 13th Month Pay and Other Bonuses – This means 13th month pay and bonuses paid to employees below PHP 90,000.00 will not be taxed.

4.0 Tax on Drinks using Sugar and Caloric / Non-Caloric Sweeteners – Beverages that use sugar and other sweeteners have been taxed effective January 2018.

5.0  Tax exemption of milk, 3-in-1 coffee, medicines for diabetes, etc. – Exempted from the sugar tax are milk, 3-in-1 coffee, 100% natural fruit juice or vegetable juice, medically-indicated beverages, and drinks and beverages that use natural sweeteners such as coco sugar or stevia. Meanwhile, drugs and medicines prescribed for diabetes</strong, high cholesterol, or hypertension have been exempted from the 12% VAT.

6.0 Incremental Tax increases  on  LPG, Diesel, Gasoline, and other fuel products until 2020.

7.0 Excise Taxes on Cars and Automobiles

8. 0 Excise  Tax on Coal until 2020

9. 0  Excise  Tax on Tobacco Products – have increased to P32.50 initially for the first six months of 2018, then will rise to P35.00 from the rest of 2018 until 2019.From 2020 to 2021, the tobacco tax will rise to P37.50, followed by a fixed tax of P40.00 to be imposed from 2022 to 2023. From 2023 onwards, tobacco taxes will rise 4% annually.

10. 0 Donor’s Tax –   at least P250,000 worth will be charged a donor’s tax of 6% flat rate.

11.0 Estate Tax – or tax levied on the properties or estate of lawful heirs and beneficiaries inherited from a deceased person, will now be subject to a flat rate of 6% on the amount in excess of P5 million.

12.0 Tax on Cosmetic Surgery and other Aesthetic Procedures – A 5% tax on cosmetic surgeries, aesthetic procedures, and body enhancements are now applicable.

13.0 Documentary Stamp Tax – The documentary stamp tax (DST) charged on some legal or business transactions has doubled from P1.50 to P3.00 beginning 2018.

14.0 Stock Transaction Tax – The stock transaction tax — a tax charged on stock sellers when a buy or sell transaction is made — will be increased to 0.6% of the gross trade amount from the current 0.5% rate. Stock-related transactions of companies not listed in the Philippine Stock Exchange (PSE) will be slapped with a higher stock transaction tax of 15%, an increase from the current 5% or 10%.

15.0 Foreign Currency Interest Income Tax – The tax on interest income on foreign currency deposits was previously pegged at 7.5%. This has increased to 15% of the interest on foreign currency deposit unit (FCDU) under the TRAIN tax reform.

16.0 Fringe Benefit Tax (FBT) – increased from 32% to 35%.  Also, the gross- up factor in computing the grossed-up monetary value of the fringe benefit is 65%.

The  Five (5)  TRAIN   Bill   Items  Vetoed  by  President  Duterte  that  will   strongly  impact   the   foreigners   doing  business  in  the  Philippines:

1.0  Regional Headquarters (RHQ), Regional Operating Headquarters (ROHQ), Offshore Banking Units, and Petroleum Service Contractors and Subcontractors – Employees  of  ROHQ,  OBU’s  and  sub-contractors    will  be taxed using the new personal income tax rates and income tax tables.

2.0  Self-employed professionals, with gross sales or receipts not exceeding P500,000, from the payment of the 3% percentage tax.

3.0  Excise tax exemptionof petroleum products 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.

4.0  Zero rating of sales of goods and services to separate customs territory and tourism enterprise zones, specifically, the areas under the Tourism Infrastructure Enterprise Zone Authority (Tieza).

5.0  Incremental Tobacco taxes.

Impact on Filipinos since January 2018:

  • Higher take-home pay for salaried workers. Unfortunately, the higher monthly household bill offsets the gains they would receive from the newly-implemented TRAIN law.
  • Increase in transportation and operational costs.
  • Philippine inflation rate now at 4% year on year this January. Prices of commodities have risen by 4% due to the excise tax on fuels. It is the highest inflation rate since October 2014.
  • Self-employed workers especially in the informal sector (i.e. farmers, fishermen, vendors, domestic helpers, drivers, carpenters, repairmen, etc.) do not feel any equivalent benefit as they pay no income taxes in the first place. Their incomes will continually be squeezed without any salary increase.
  • While it remains to be seen, tax advocates, however, expect this to be offset by the cash transfers and subsidies earmarked by the government for the 10 million poorest households to help them cope with higher prices of fuel and sugar-sweetened drinks.
  • In the residential market, Colliers said part of the TRAIN bill is the removal of the VAT exemptions on the sale of low-cost housing and residential lots valued up to P1,919,500 and other residential dwellings priced up to P3,199,200. This will make it more difficult for lower income families to own a house and lot.
  • The removal of the VAT exemption on residential leases amounting to PHP12,800 and less will also see an additional increase in rental rates. Higher rents will consequently push vacancies up in existing condominiums. The imposition of additional taxes on residential leases will accelerate the on-going trend in the condominium market of rising vacancies.

Impact on Expatriates in the Philippines:

  • Expected shift from foreign currency deposits to local peso accounts for salaries.
  • Automobile companies likely to shift focus to sale of standard cars and hybrid cars and consequently reduced revenue.
  • Possible reduction in the number of topmost managerial positions of regional operating headquarters (ROHQs). High earning ROHQ employees (earning PHP975,000 and up) have been disallowed from enjoying a 15% special tax rate, putting them in the regular tax schedule at par with non-alien resident taxpayers.
  • Possible reduction in fringe benefits provided by companies due to a higher expense budget.
  • Possible adjustments to housing budgets of expatriates. Affected companies may become creative on relocation packages – i.e. ratios between house rental and monthly utilities.
  • Probable rise in housing choices.
  • Possible requests for increased salaries from domestic help and drivers.
  • Surge in rental car services and rates.

Sources: http://www.dof.gov.ph/taxreform/index.php/2017/12/26/non-taxpayers-benefit-new-tax-reform-law/