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Revised income tax system under the TRAIN law

by December 24, 2017 General

On December 19, the current administration rolled out what it touted as its early Christmas gift to Filipinos: Republic Act (RA) No. 10963, or the Tax Reform Act for Acceleration and Inclusion (TRAIN). Congress approved and ratified the final version of the reform after the bicameral conference committee reconciled the conflicting provisions of the versions of the House of Representatives (House Bill No. 5636) and the Senate (Senate Bill No. 1592).

One of the main intentions of this new law is to update our antiquated income tax system. Being the largest source of government collection, the income tax system will play a crucial role in realizing the government’s target collection.

First in the list of reforms is the updated Section 24 of the National Internal Revenue Code (NIRC), which provides the revised income tax rates for individuals. From January 1, 2018 to December 31, 2022, the income tax rates for individual taxpayers will be replaced with 0 percent-35 percent progressive tax rates, from the existing 5 percent-32 percent graduated tax rates, with the number of tax brackets reduced from seven to six, and thresholds for each tax bands adjusted.

Under the TRAIN law, individual taxpayers earning an annual salary of P250,000 will fall into the lowest tax bracket, and their income will be subject to 0 percent income tax rate, while the tax rate applicable to those earning above P8 million will be raised from 32 percent to 35 percent.

A new tax schedule will then be introduced starting January 1, 2023, which will minimally reduce the applicable rates on the income of taxpayers, except those in the top income tax bracket who shall continue to be subject to 35 percent.

Further update to this section includes an option for purely self-employed individuals and/or professionals, whose gross sales or gross receipts and other non-operating income do not exceed the value-added tax (VAT) threshold as provided in Section 109 (BB) (amounting to P3,000,000 or less), to be taxed at a rate of 8 percent on their gross sales or gross receipts and other non-operating income in excess of P250,000, in lieu of the new income tax rates.

In addition, for mixed income earners, their compensation income shall still be subject to graduated income tax rates. However, for their income from business and/or practice of profession, they have the option to be subject to 8 percent tax or graduated income tax rates if their gross sales or gross receipts and other non-operating income do not exceed the VAT threshold. Otherwise, there is no option to avail of the 8 percent tax rate and all income shall be subject to graduated income tax schedule.

The final income tax rate for interest income received under the expanded foreign currency deposit system was increased from 7.5 percent to 15 percent. Capital gains tax from sales of shares of stock not traded on the stock exchange is similarly fixed at the rate of 15 percent based on the net capital gain realized.

Another notable revision brought about by this new law is the addition of Section 25 (F), removing the privilege to avail of the 15 percent preferential tax rate on gross income of employees of Regional Operating Headquarters (ROHQs), Regional Headquarters (RHQs), Offshore Banking Units (OBUs), and Petroleum Contractors and Subcontractors registering with the Securities and Exchange Commission (SEC) after January 1, 2018. Those presently availing of the 15 percent preferential tax rate for their qualified employees shall continue to be entitled to avail of the preferential tax rate for their present and future qualified employees.

This new law also removed the personal exemption of P50,000 and additional exemption of P25,000. Further, the deductibility of premium payments on health and/or hospitalization insurance was eliminated. This means that individual income earners will be taxed on gross basis, without regard for their status.

For benefits being enjoyed by compensation earners, the exemption for 13th month pay and other benefits has been increased to P90,000. Also, for companies providing fringe benefits to its employees occupying managerial and/or supervisory positions, there is an increase in the fringe benefit tax (FBT) rate from 32 percent to 35 percent effective 1 January 2018.

RA No. 10963 also inserted an additional provision with regard to General Professional Partnerships’ (GPPs) claim for Optional Standard Deduction (OSD). GPPs and the partners can now avail of the OSD only once, either by the GPP or the partners comprising the same.

In terms of filing of the income tax returns, the new law mandates that individual and corporate income tax returns shall consist of only four pages. However, this is still to be implemented by the executive department by issuance of the revised income tax returns.

Lastly, the deadline for filing the Quarterly Income Tax Return (BIR Form 1701Q) for the first quarter will be moved on or before May 15 of the same taxable year. On another note, for those availing of the installment payment for payment in excess of P2,000, the second installment payment shall be made on or before October 15 following the close of the taxable year.

While RA No. 10963 is now formally a law, President Duterte can still exercise his power to veto certain provisions as he sees fit. One provision that is at risk of being dropped is the removal of 15 percent preferential tax rates mentioned above.

There is no question that the passage of this law brings the government one step closer to achieving its goal of a simpler and fairer tax system while increasing collection to fund its ambitious infrastructure program. The ball is now in the hands of the executive body to make sure it rolls in the right direction.

The author is a senior 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.