Navigating the TRAIN tracks

By Bjorn Biel M. Beltran, Special Features Writer

Predictably, when the Duterte administration came out with the Tax Reform for Acceleration and Inclusion (TRAIN) law, seeking to make the country’s tax system “simpler, fairer, and more efficient”, it was met with a variety of responses, from praises and commendations saying that the new law will boost the Philippines’ credit rating and attractiveness to foreign investors, to condemnations denouncing it as ‘anti-poor’. The first package of the TRAIN law made radical changes to the Philippines’ tax system, slashing income taxes for low-income Filipinos while raising excise taxes for automobiles, petroleum products, and sweetened beverages.

Many of the country’s biggest legal and tax consultation firms side with the former, believing that the current administration can bring the ambitious undertaking to its intended goal of making the country’s taxation more simplified and more equitable so long as there are safeguards put in place to relieve the burden of those in the lowest tax brackets.

“The government has a clear vision on what it hoped to achieve and a road map on how to get it done, as well as a timetable to follow,” Atty. Luis Jose Ferrer, tax head of SGV & Co., the Philippines’ largest professional services firm that provides assurance, tax, transaction and advisory services, told BusinessWorld in an e-mail.

“It is ambitious. The realities on the ground have to be considered and the legitimate concerns of those that were adversely affected by the changes need to be somehow addressed,” he added.

Atty. Nilo T. Divina, founder and managing partner of the full-service law firm DivinaLaw, and dean of the University of Sto. Tomas Faculty of Civil Law, expressed the same sentiments.

“The tax reform program of the administration is equitable. It tends to favor the poor rather than the rich. We just need to simply trust our President to make it less burdensome on the part of the common people, and the tax burden has to be shouldered by those who can afford it. This is the concept, the meaning of equitable taxation,” Atty. Divina said in an interview with BusinessWorld.

Navarro Amper & Co., the Philippine member firm of Deloitte Southeast Asia Ltd, believes that the TRAIN Law’s biggest impact will be on the consumption patterns of consumers.

“After seeing a high take-home pay because of the TRAIN law, people are now thinking about what commodities to spend on,” Atty. Walter L. Abela, Jr., Deloitte Philippines’ Tax & Corporate Services leader, told BusinessWorld in an interview.

This highlights a new aspect of the tax law in relation to businesses: many corporations are very interested in the consumption patterns of their buyers and are actively studying such patterns to gain a competitive advantage.

Such research is needed, not only to gain an advantage but to seamlessly navigate the tricky process of tax compliance. This is especially true for those businesses in industries most hit by the raised excise taxes.

“In any tax reform law, or any tax law for that matter, businesses would have to find ways to adjust,” Atty. Divina said. “You have to be efficient. You have to hire professionals, lawyers, accountants, to help you navigate through the changes made or introduced by law. The bottom line is we all have to adjust and find ways to be efficient given the changes in the regulatory environment.”

Atty. Ferrer added: “The businesses that were directly impacted by the changes will definitely have to rethink their current business model and/or consider restructuring in order to be more efficient and competitive. The move towards digital tax administration, i.e., mandating e-invoicing will certainly put companies on notice to improve tax compliance because the tax authorities will soon have real or near real-time visibility over their transactions.”

For corporate taxpayers, therein lies the danger. Such sweeping changes to the Philippines’ tax system cannot be disregarded, and it is crucial that businesses give it a significant amount of attention should they wish to adapt to it successfully.

Atty. Ferrer continued, “Complacency in tax compliance or using the same practices as before may eventually prove to be costly. Businesses need to take their tax obligations more seriously and endeavor to be more tax-compliant.”

“That’s where we see the problem. Not reading enough, or reading without understanding and appreciating the rationale of the law, the import, and the consequences,” Atty. Divina said.

For its part, the government needs to help taxpayers in this transitionary period to promote tax compliance and understanding of the changes to the tax system.

“The government has to come up with appropriate regulations and clear guidelines immediately so that everyone will know right away how to comply with the changes in taxation,” Atty. Abela said.

From an international perspective, only four months in, it remains to be seen whether the TRAIN law will improve the country’s attractiveness to foreign investors. And taxation is hardly the sole factor in this process.

Atty. Abela noted that political stability and security will also come into play with regard to the Philippines’ economic competitiveness.

“While our new tax system aims to make the Philippines more competitive, the new tax rates are still high if not the highest in ASEAN. There is much to be done. The proposed rationalization of tax incentives, particularly for those businesses presently enjoying them, have to be studied and planned more closely if we do not wish to lose these businesses to other countries,” Atty. Ferrer said.

He noted that the stability in the interpretation and enforcement of tax laws and regulations need more improvement, as frequent changes in tax laws and rules, including sometimes inconsistent interpretation and enforcement thereof can wreak havoc on businesses.

“An efficient, effective and speedy mechanism for the resolution of tax disputes is likewise lacking. Compliance with tax laws and regulations is difficult and costly due to complicated tax rules and the existence of so many requirements. More simplification would definitely be of benefit to all tax stakeholders,” Atty. Ferrer concluded.

Ultimately, the question of the impact of tax reform falls to the government’s successful implementation of the full TRAIN package.

Atty. Divina said that it is simpler to theorize and debate on the intricacies of legislation when it is still on paper, and it is quite more complex and difficult when put into practice.

“Every piece of legislation is supposedly perfect; it has undergone brainstorming, discussions, deliberations. It is the product of the collective input and wisdom of the legislators, taking to account of course the comments, observations, and insights of experts. The gaps surface only in the course of implementation,” he said.

“It’s a good tax law,” Atty. Abela added. “The challenge is in the administration and implementation.”