Lowering Personal Income Tax (PIT)

TRAIN lowers personal income tax (PIT) for all taxpayers except the richest. Under TRAIN,
those with annual taxable income below P250,000 are exempt from paying PIT, while the
rest of taxpayers, except the richest, will see lower tax rates ranging from 15% to 30% by 2023.
To maintain progressivity, the top individual taxpayers whose annual taxable income exceeds P8
million, face a higher tax rate from the current 32% to 35%.

Husbands and wives who are both working can benefit from a total of up to P500,000 in
exemptions. In addition, the first P90,000 of the 13th month pay and other bonuses will be
exempt from income tax. Overall, the effective tax rates will be lowered for 99% of tax payers.

Currently, a person who has a taxable income of P500,000 annually is taxed at 32% at the
margin. TRAIN will bring this down to 25% in 2018, and will be further brought down 20%
after five years.

Minimum wage earners will continue to be exempted from income taxes as their income falls
below P250,000. In addition, the new tax structure will address the current problem wherein
going a peso above the minimum wage will result in a lower effective take home pay, thereby
discouraging minimum wage earners to accept incremental wage increases and keeping them in
an artificial minimum wage trap.

The simplified tax system will increase the take home pay of most individuals and encourage
compliance. Self-employed and professionals (SEPs) with gross sales below the VAT threshold
now have the option to pay a simpler 8% flat tax in lieu of income and percentage tax, while
those above the VAT threshold will follow the PIT schedule.

Meet John Cruz, a call center agent.

John Cruz is a call center agent with a family of three. He commutes from Montalban, Rizal to his office in
Makati and leaves the house at 4:00 AM to avoid heavy traffic. He spends his daily on fare to and from
work, and on food for the family, and monthly on household expenses such as electricity, water, and internet
connection. On top of these expenses, he gets monthly salary deductions to pay for taxes under the
antiquated tax system in place. This makes saving for the family difficult for John.

John receives a monthly salary of P21,000 or P252,000 annually. At present, P21,867 is deducted from his
annual salary under current personal income tax (PIT) rates. With the proposed tax reform, John will be
among the many hardworking Filipinos who will be exempted from paying personal income tax. Tax reform
will increase John’s take-home pay, helping him and his family save and giving him more financial freedom.
This will be a great help for John!
Simplifying the Estate and Donor's Tax
In the current system, the tax rates can reach up to 20% of the net estate value and up to
15% on net donations. TRAIN seeks to simplify this. Estate and donor’s tax will be lowered
and harmonized so it does not matter if the person passed away, donated a property, or simply
wants to transfer a property. This will result in loss revenues but the key here is to make the land
market more efficient so that the land will go to its best use.

Estate Tax - Instead of having a complicated tax schedule with different rates, TRAIN reduces and
restructures the estate tax to a low and single tax rate of 6% based on the net value of the estate with a
standard deduction of P5 million and exemption for the first P10 million for the family home.

Donor Tax - TRAIN also simplifies the payment of donor’s taxes to a single tax rate of 6% of net donations
is imposed for gifts above P250,000 yearly regardless of relationship to the donor.

Expanding the Value-Added Tax (VAT)

The Philippines has one of the highest VAT rates but also the highest number of
exemptions in the Southeast Asia region. Consequently, the Philippines collect the same
amount of VAT revenues as a percentage of the economy as that of Thailand despite only
imposing a 7% VAT rate, while the Philippines is at 12%.
These tax exemptions have been given to many sectors and were supposedly very well meaning.
However, these exemptions have also created much confusion, complexity, and discretion in our
tax system resulting in leakages and opening doors for negotiation, corruption, and tax evasion.

The truth is, these exemptions are not free and someone pays for them, and it is most often the
poor who pays as they are deprived of quality public service necessary to accelerate their
graduation out of poverty.

TRAIN aims to clean up the VAT system to make it fairer and simpler and lower the cost of
compliance for both the taxpayers and tax administrators. This is achieved by limiting VAT
exemptions to necessities such as raw agriculture food, education, and health. This does not
mean that the benefits the poor rightly deserve will be removed. The Duterte administration
commits to use the budget to provide targeted transfers and programs that are more transparent
and accountable. The administration will direct the way to protect the poor and vulnerable
compared to the tax exemptions and blind subsidies that are inefficient and largely beneficial to
the rich since they have higher purchasing power.

TRAIN repeals 54 out of 61 special laws with non-essential VAT exemptions, thereby making
the system fairer. Purchases of senior citizens and persons with disabilities, however, will
continue to be exempt from VAT. Housing that cost below P2 million will be exempt from VAT
beginning 2021, while medicines for diabetes, high cholesterol, and hypertension will be exempt
beginning 2019.

The reform also aims to limit the VAT zero-rating to direct exporters who actually export goods
out of the country. This will be implemented together with an enhanced VAT refund system that
will provide timely cash refunds to exporters.

The VAT threshold is increased from P1.9 million to P3 million to protect the poor and low-
income Filipinos and small and micro businesses and for manageable administration. This
effectively exempts the sale of goods and services of marginal establishments from VAT. Under
TRAIN, VAT exempt taxpayers will have the following options:

● PIT schedule with 40% OSD on gross receipts or gross sales plus 3% percentage tax

● PIT schedule with itemized deductions plus 3% percentage tax, or

● Flat tax of 8% on gross sales or gross revenues in lieu of percentage tax and personal income
tax.

Increasing the Excise Tax of Automobiles

TRAIN simplifies the excise tax on automobiles, but lower-priced cars continue to be taxed
at lower rates while more expensive cars are taxed at higher rates. This excise will raise
revenue in a very progressive manner as the richer buyers tend to own more and expensive cars
compared to those who earn less.
When we consider the TRAIN as a package, the increase in take home pay from the personal
income tax reduction will be more than enough to offset the increase in prices resulting from
adjustments in excise taxes. For example, those who will purchase a Vios will be able to save
P16,122 despite the increases in taxes, and those who buy an Innova will save around P29,923
even if they buy a car with the new rates. For a Vios, this translates to only an additional P183 in
monthly amortization assuming a standard loan term of five years. This implies that for a typical
buyer, the additional take home pay from the PIT reform will more than fully offset the increase
in amortization.

Increasing the Tax of Sugar-Sweetened Beverages

The SSB excise tax will help promote a healthier Philippines. Along with the Department of
Health (DOH), DOF supports this as part of a comprehensive health measure aimed to curb the
consumption of SSBs and address the worsening number of diabetes and obesity cases in the
country, while raising revenue for complementary health programs that address these problems.
This is a measure that is meant to encourage consumption of healthier products, to raise public
awareness of the harms of SSBs, and to help incentivize the industry to develop healthier
products and complements.

Why impose a tax on SSBs?

● Most of the sugar-sweetened beverage, with some notable exceptions provide unnecessary or
empty calories with little or no nutrition. SSBs are not a substitute for healthy foods such as
fruits and rice.

● SSBs are relatively affordable especially to children and the poor who are the most vulnerable
to its negative effects on health.

● SSB products are easily accessible and can be found in almost any store, unlike other
sweetened products. Most often, the poor and the children are not aware of their consequences.

Common examples of SSB products include carbonated beverages, sports and energy drinks,
and sweetened juice drinks. Under TRAIN, an excise rate of P6 per liter will be taxed on drinks
containing caloric or non-caloric sweetener, and P12 per liter on drinks containing high-fructose
corn syrup. 3-in-1 coffee and milk are exempt from this tax.

Consumption of SSBs, mostly softdrinks, is significantly linked to high incidences of

overweight, obesity, and diabetes worldwide, including in low and middle-income
countries.<sup1< sup=""> The National Nutrition Survey (2003-2015) indicates an increasing
trend of overweight or obese Filipinos through the years and across age groups, especially
among the poor.</sup1<>

In addition, habitual consumption of SSB is associated with greater incidence of Type 2

diabetes.2 According to the International Diabetes Foundation, there are around 3.5 million cases
of diabetes in the Philippines. In 2015, government reimbursements on hemodialysis totaled to
about P7.4 billion covering 1.1 million patients. This is considerably high spending for
PhilHealth especially on benefit payout for diseases that are preventable with evidence-based
and recommended public policy interventions. In total, around P300 billion is spent annually by
diabetic patients on maintenance medicine and operations. The government needs sufficient
revenues to fund diabetes treatment as inaction will worsen these problems.

The SSB excise tax, as a health measure, will encourage individuals and families to make
healthy choices to ensure a healthier and more productive population. To complement the SSB
excise tax, there are also non-tax measures organized around the Health in All Policies
approach. This strategy is envisioned to include regulatory measures on marketing, mandatory
labeling, information and advocacy measures for health promotion, and improved nutrition
literacy among Filipinos.