Train law: What does it

change?
As a tax lawyer, I noticed that there are a lot of news reports on the changes.
But actually, there are much more significant changes under the Train law
which are not being reported.

As we celebrated the New Year, the Tax Reform for Acceleration and Inclusion
(Train) Law or Republic Act No 10963 took effect on January 1, 2018. Train
overhauls the outdated National Internal Revenue Code (NIRC) which was
adopted 20 years ago.
As a tax lawyer, I noticed that there are a lot of news reports on the changes.
But actually, there are much more significant changes under the Train law
which are not being reported.

Train relatively decreases the tax on personal income, estate, and donation.
However, it also increases the tax on certain passive incomes, documents
(documentary stamp tax) as well as excise tax on petroleum products,
minerals, automobiles, and cigarettes.
The Train law also imposes new taxes in the form of excise tax on sweetened
beverages and non-essential services (invasive cosmetic procedures) and
removes the tax exemption of Lotto and other PCSO winnings amounting to
more than P10,000.

Nonetheless, the new law also contains praiseworthy provisions which aim to
simplify tax compliance.
Reduced taxes

Personal Income Tax

The most popular part of the Train law is the reduction of personal income tax
of a majority of individual taxpayers. Prior to the enactment of the new law, an
individual employee or self-employed taxpayer would normally have to pay
income tax at the rate of 5% to 32%, depending on one's bracket.

Under Train, an individual with a taxable income of P250,000 or less will now
be exempt from income tax. Those with a taxable income of above P250,000
will be subject to the rate of 20% to 35% effective 2018, and 15% to 35%
effective 2023. Moreover, the deductible 13th month pay and other benefits are
now higher at P90,000 compared to P82,000 under the old law.

The table shows the comparison of the brackets and tax rates under the NIRC
and Train:

Another innovation under Train is the option of self-employed individuals and/or

professionals whose gross sales or receipts do not exceed P3,000,000 to avail
of an 8% tax on gross sales or gross receipts in excess of P250,000, in lieu of
the graduated income tax rates.

It is not being highlighted, however, that some items that were previously
deducted to arrive at taxable income had been removed under Train. These are
the personal exemption of P50,000, additional exemption of P25,000 per
dependent child, and the premium for health and hospitalization insurance of
P2,400 per year.

Estate Tax
The estate tax rate was also changed from 5% to 32% of the net estate to a flat
rate of 6%. Additionally, the following deductions allowed in computing the net
estate (to be subjected to estate tax) were increased:

Donor’s tax

The donor’s tax rate was also amended to a single rate of 6% regardless of the
relationship between the donor and the donee. In the old law, the rates of
donor’s tax were 2% to 15% if the donor and donee are related, and 30% if
otherwise. However, the donation of real property is now subject to
Documentary Stamp Tax of P15 for every P1,000.

Value Added Tax

There are also amendments to VAT which lessen the burden of taxpayers:

1. Increase of VAT threshold from P1,919,500 to P3,000,000

2. Starting 2019, the sale of drugs and medicines for diabetes, high
cholesterol, and hypertension will be exempt from VAT
3. Increase of VAT exemption for lease of a residential unit from
P12,800 to P15,000
4. Association dues, membership fees, and other assessments and
charges collected by homeowners associations and condominium
corporations are now expressly VAT exempt

Increased taxes

Passive Income

Train imposes higher taxes on some passive incomes, including interest income
from dollar and other foreign currency deposits.

There is also a significant increase in the tax on sale of shares of stocks.

Excise Tax

Train imposes higher excise taxes on cigarettes, manufactured oils (petroleum

products), mineral products and automobiles.

Cigarettes

Manufactured oils and other products

Mineral products
Automobiles

Hybrid vehicles shall be subject to 50% of the applicable excise tax rates. But
purely electric vehicles and pick-ups shall be exempt from excise tax.

Documentary Stamp Tax

Unlike the House of Representatives’ version of Train wherein no change was

introduced on the rates of Documentary Stamp Taxes (DST), Train increases the
DST on almost all taxable documents.
New taxes

Aside from increase and decrease of certain taxes, Train also introduces new
taxes in the form of excise tax on sweetened beverages and non-essential
services.

Sweetened Beverages

Non-essential services

Invasive cosmetic procedures directed solely towards improving, altering, or

enhancing the patient’s appearance is now subject to excise tax of 5%.

PCSO winnings

Previously, PCSO winnings, regardless of amount, were exempt from tax. Train
subjects PCSO winnings to a 20% final withholding tax if the amount is more
than P10,000.

Simplified tax compliance

Apparently, the Philippine tax system is a very complicated one. This was
certainly considered by Congress when it enacted the Train law. Consequently,
Train introduces amendments which are geared towards simpler tax
compliance. Some of these amendments are:

1. The Income Tax Returns shall not be more than 4 pages

2. The Tax Return for final and creditable withholding taxes shall be
filed quarterly instead of monthly
3. With regard to estate tax, the following measures were adopted to
simplify its computation and payment:
o In lieu of actual funeral expenses (up to P200,000) and
medical expenses (up to P500,000), Train increases the
standard deduction (wherein no substantiation is required)
from P1,000,000 to P5,000,000
o Notice of death is no longer required
o CPA certification is now required only if the gross estate is
above P5,000,000 (up from P2,000,000)
o The deadline for filing of estate tax return is now one year
from death (before, 6 months from death)
o Bank deposits left by the decedent may be withdrawn by the
heirs subject only to 6% withholding tax. Before a certification
from the BIR that estate tax has been paid was required.
 4. Beginning January 1, 2023, the filing of VAT Return and payment of
tax shall be done quarterly instead of monthly
5. The BIR is required to act on application for VAT refund within 90
days. Otherwise, the BIR official, agent or employee will be
criminally liable.
6. The Financial Statements of a taxpayer should be audited if the
gross annual sales, earnings, receipts or output exceed P3,000,000
(up from P150,000)

With the enactment of the Train law, the government expects to generate more
revenues to fund its "Build, Build, Build" projects and other programs. At the
same time, the labor sector is expected to be freed from the burden of outdated
and inequitable personal income tax. Hopefully, this benefit for the workers can
still be achieved despite the increase in prices of some goods that they
consume.

Read our law office's comprehensive comparison of the NIRC and the Train
law here. – Rappler.com

This article is for general information only. If you have any question or
comment regarding this article, you may email the author at
egialogo.gdlaw@gmail.com.

Atty Edward G. Gialogo is the managing partner of Gialogo Dela Fuente &
Associates. He is also a tax speaker in Philippine Institute of Certified Public
Accountants and Business Law Reviewer in Review School of Accountancy
(ReSA). He was an Associate Director in the Tax Services of SyCip Gorres
Velayo & Co.