The much-awaited promise to the Filipino taxpayers and one of the government’s crown jewels, the Tax Reform for Acceleration and Inclusion (TRAIN), took effect on Jan. 1. For some, the TRAIN law is an answered prayer, 20 years in the making, to the plight of taxpayers against the seemingly disproportionate favor accorded by the previous tax law (Tax Code of 1997) to those who are called the “ultra rich.” For others, the TRAIN law poses many other questions which remained unanswered.
To deal with this, under the general principles of administrative law, the administrative agencies of the government are given the power to implement the general policies laid down in a statute by “filling in” the details through the issuance of implementing rules and regulations (IRRs).
After a few months and a series of flip-flopping tax advisories, the Bureau of Internal Revenue (BIR) has finally issued the celebrated IRRs for income tax, withholding tax, estate and donor’s tax, and value-added tax (VAT) to bring the cycle full circle.
These IRRs issued through Revenue Regulations (RRs), which have the force and effect of law, are intended to clarify or explain the TRAIN law and carry into effect its general provisions for the benefit of all taxpayers.
The following, among others, are the salient features of the supplemental regulations (RRs Nos. 8, 11, 12, 13, and 14-2018) to the TRAIN law which should be added in every taxpayer’s checklist:
1. New income tax rates for individual citizen and resident aliens:
Graduated marginal tax rates ranging from 20% to 35% (old: 5% to 32%) on taxable income brackets from P250,001 to P8 million (old: P10,000 to P500,000).
2. For qualified purely self-employed individuals earning income not exceeding P3 million a year:
The option to avail of graduated rates (5% to 35%) OR an 8% tax on gross sales or receipts and other non-operating income in excess of P250,000, in lieu of the graduated income tax rates and 3% percentage tax.
3. For individuals earning income from compensation and from self-employment (mixed income earners):
a. Compensation income subject to the graduated tax rates.
b. If the gross sales/receipts and other non-operating income do not exceed the P3 million VAT threshold:
Graduated income tax rates OR 8% of gross sales or receipts and other non-operating income in lieu of the graduated income tax rates and 3% percentage tax
c. If the gross sales/receipts and other non-operating income exceed the VAT threshold — subject to graduated income tax rates.
4. Employees of the regional or area headquarters or regional operating headquarters of multinational companies, offshore banking units and petroleum service contractors and subcontractors — regular income tax rates.
5. 13th-month pay and other benefits received by officials and employees of public and private entities are tax exempt up to P90,000.
6. Basic, holiday, overtime, hazard, and night differential pay of minimum wage earners (MWEs) are tax exempt regardless of amount. Other taxable income (i.e., commissions) are exempt up to P250,000.
7. Filing of 1st Quarterly Income Tax Return on May 15 (previously April 15) for self-employed individuals.
8. A second installment of tax due in excess of P2,000 due on Oct. 15 (previously July 15).
1. Interest income received by an individual taxpayer (except a non-resident individual) from a depository bank under the expanded foreign currency deposit system – 15% (previously at 7.5%).
2. Philippine Charity Sweepstakes and Lotto winnings, except those amounting to P10,000 or less – 20% (previously exempt regardless of amount).
3. Capital gains from the sale of shares of stock not traded on the Stock Exchange – 15% (previously 5%/10%).
4. Fringe benefits tax at 35% (previously 32%).
5. Income payments to professionals:
a. For individuals
• 5% if the gross income for the current year does not exceed P3 million
• 10% if the gross income exceeds P3 million or VAT registered regardless of the amount. Income payments to partners of General Professional Partnerships (GPPs), on the other hand, are subject to 15% EWT (if the gross income for the current year exceeds P720,000) and 10% EWT (if otherwise); OR
• Exempt if (a) income did not exceed P250,000; and (b) the source of income only comes from one customer. Income payee must submit to the payor a sworn declaration of his gross income to be subject to the exempt or 5% rate.
b. For corporations and partners of General Professional Partnerships (GPPs), EWT rate remains at 10% (if the gross income for the current year did not exceed P720,000) or 15% (if the gross income exceeds P720,000).
6. The withholding tax returns shall be due on the last day of the month following the close of the quarter when the withholding was made.
• New forms have been issued — BIR Form No. 1601EQ for creditable withholding tax, and 1601FQ for all other final withholding taxes. Forms 1602 for final tax on interest on bank deposits, 1603 for final tax withheld on fringe benefits; and
• On a monthly basis, withholding taxes shall be remitted using BIR Monthly Remittance Form (Forms 0619E and 0619F) every 10th/15th day of the following month when the withholding is made, regardless of the amount withheld.
7. A new classification, top withholding agents, was created, who are required to withhold 1% or 2% EWT on all suppliers of goods/services. This includes taxpayers identified as Medium Taxpayers and those under the Taxpayer Account Management Program (TAMP) as well as previously classified as top 20,000 corporations and top 5,000 individuals.
TRANSFER TAXES (ESTATE AND DONOR’S TAX)
1. Net estate shall be subject to an estate tax of 6%.
2. Standard Deduction of P5 million (previously P1 million) for a citizen or resident or P500,000 (for non-resident alien) and Family Home of P10,000,000 (previously P1,000,000).
3. Compliance requirements:
• Filing of Estate Tax returns within one year of death (previously within six months), extendible to thirty days for meritorious cases.
• The payment, if it would impose the undue hardship upon the heirs may be extended up to five years for judicial settlements of the estate or two years if extrajudicial.
• Installments within 2 years from filing subject to certain conditions (previously no installment payments).
4. If the bank has knowledge of the death of a depositor, alone or jointly with another, withdrawals shall be subject to final withholding of 6% estate tax.
5. Donor’s tax of 6% in excess of P250,000 (previously 2% to 15% OR 30% if the donee is a stranger).
6. The transfer of property, other than real property, for less than an adequate consideration shall be exempt from donor’s tax if made in the ordinary course of business (bonafide transaction, at arm’s length, and free from any donative intent).
1. VAT threshold increased to P3 million (previously P1,919,500).
2. VAT zero-rating exclusive for direct exports. The following indirect exports shall be subject to 12% VAT upon successful establishment of enhanced VAT refund system:
Sale of goods and properties
a. Sale of raw materials or packaging materials to a non-resident buyer for delivery to a resident export-oriented enterprise paid for in acceptable foreign currency.
b. Sale of raw materials or packaging materials to an export-oriented enterprise (70% exporter).
c. Transactions considered export sales under Executive Order No. 226.
Sale of services
a. Processing, manufacturing or repacking goods for other persons doing business outside the Philippines, which goods are subsequently exported, and paid for in foreign currency.
b. Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise exporting 70% of the total production.
3. VAT-exempt transactions:
a. Residential lot — P1,500,000 by 2018 and 12% VAT by 2021.
b. House and lot and other residential dwellings — P2.5 million by 2018 and P2 million by 2021.
c. Real properties utilized for low-cost housing — 12% VAT by 2021.
d. Real properties for socialized housing — still exempt.
e. Lease of residential units with a monthly rental per unit not exceeding P15,000 (previously P12,000).
f. Transfer of property pursuant to Section 40(C)(2) of the Tax Code also known as a tax-free exchange.
g. Association dues, membership fees, and other assessments and charges collected on a pure reimbursement basis by homeowners’ associations and condominium corporations.
h. Sale of drugs and medicines for diabetes, high cholesterol, and hypertension, beginning Jan. 1, 2019.
Surely, the importance of the above list cannot be overemphasized due to its direct impact on the public. By keeping abreast of the latest in the tax reform program of the government, effective tax planning strategies can be timely implemented to aid taxpayers in navigating the tax maze within the precepts of the law.
The true challenge of government is to increase the level of tax consciousness and the number of taxpayer-believers who are willing to contribute to its multifarious activities aimed to support the needs of the Filipino people.
Daryl Matthew A. Sales is a manager with the Tax Advisory and Compliance division of P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing services firms in the Philippines.