Philippine Tax Reform Packages: What to expect?
The need to accelerate poverty reduction and to sustainably address social and economic inequality are pervasive issues in the Philippines. To address these issues, the current administration, through the Department of Finance (DOF), initiated the Comprehensive Tax Reform Program (CTRP) which aims to make the tax system of the Philippines simpler, fairer, and more efficient[1]. In this regard, the DOF rolled out four (4) major tax packages as of date.[2]
The first tax package is the Tax Reform for Acceleration and Inclusion (TRAIN) Act which was signed into law by the Philippine President on 19 December 2017 and became effective beginning 1 January 2018. The TRAIN Act aims to enhance the progressivity of the Philippines’ tax system, to provide an equitable relief to a greater number of taxpayers and their families, to improve levels of disposable income of the latter, and to increase economic activity.[3] As such, the TRAIN Act includes several provisions amending the National Internal Revenue Code (NIRC) of 1997 effectively lowering the rate of individual income tax, estate tax, and donor’s tax. To complement the TRAIN Act, Republic Act No. 11213 or Tax Amnesty Act was also enacted to give errant taxpayers a “fresh start” by allowing them to settle long outstanding tax dues.[4] Labeled as Package 1B by the DOF, the Tax Amnesty Act provides a six percent (6%) estate tax amnesty rate on unsettled estate of decedents who died on or before 31 December 2017 or Php5,000.00, whichever is lower.[5] The Tax Amnesty Act also provides an amnesty on tax delinquencies on all national internal revenue taxes such as income tax, withholding taxes, value added tax, donor’s tax, excise tax, and percentage taxes for taxable year 2017 and prior years.
The second tax package, the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, is currently being deliberated in the Philippine Senate. In comparison to the TRAIN Act which provides tax reliefs for individuals, estates, and donors, the CREATE Act grants tax reliefs to corporate entities. Significant amendatory provisions of the CREATE Act includes the following:[6]
- a. An immediate five percentage (5%) point cut in the corporate income tax rate starting July 2020 and 1 percentage (1%) point reduction for every year from 2023 to 2027;
- b. The prolonging of the “sunset period” by two years;
- c. Extension of up to nine (9) years of the five percent (5%) tax on gross income earned incentive for registered business activities; and
- d. The grant of power to the President to modify the mix, period, or manner of availment of incentives for highly desirable projects or specific industrial activities.
The third tax package which is the Real Property Valuation Reform is currently pending in the Committees on Ways and Means, Local Government, and Finance in the Philippine Senate.[7] The salient features of this tax package includes adoption of international standards in the process of valuation of real property, establishment of a single valuation base for taxation of real property, and the formation of Property Valuation Service to oversee and manage valuation related concerns of local governments.[8]
The fourth tax package is the Passive Income and Financial Intermediary Taxation Act (PIFITA) which is currently being discussed in the Committee hearings of the Philippine Senate. PIFITA complements the recently-passed TRAIN Act by making passive income and financial intermediary taxes simpler, fairer, more efficient, and more competitive in the ASEAN region.[9] Significant provisions include the following:[10]
- a. A single rate of fifteen (15%), in general, will be imposed on interest income, dividends, and capital gains.
- b. A single gross receipt tax rate of five (5%) will be imposed on banks, quasi banks, and certain non-bank financial intermediaries.
- c. A uniform two percent (2%) tax of the premium of pre-need, pension, life, and HMO insurance.
- d. The IPO tax will be removed as it is seen as a tax on capital, and is detrimental to the capital markets.
- e. Equalize tax treatment of debt and equity by: (a) a gradual reduction of the 0.6% stock transaction tax by 0.1 percentage point every year until it reaches 0 by 2026, and (b) a temporary imposition of a 0.1% transaction tax on listed and traded debt instruments at the Philippine Dealing Exchange, which will also be removed by 2026. Documents which are non-monetary in nature will also be exempted from DST.
Altogether, it is too early to assess if these four major tax packages effectively address the issues of poverty reduction and socio-economic inequality in the Philippines. The effect of these tax packages on a macro-economic level is yet to be seen or assessed in the next few years. Undoubtedly, however, these tax laws will surely open a number of opportunities for our clients, both individuals and corporate. As their lawyers, we must be ready to assist our clients in availing tax reliefs, in exploring tax savings opportunities, and in establishing tax efficient mechanisms under the new Tax Code. Most importantly, these new tax packages will create avenues for us to create more value to our clients as their business partners.
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