>>>All the Taxpayers Need to Know About the TRAIN Law (Paper Bound)

All the Taxpayers Need to Know About the TRAIN Law (Paper Bound)

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by Eric R. Recalde

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by Eric R. Recalde

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Most Filipinos complain that the Government collects too much tax from them, and with good reason. It has been almost twenty years since the passage of the “Tax Reform Act of 1997,” then dubbed as the Comprehensive Tax Reform Program (CTRP). Obviously, it is already outdated. Hence, Congress, upon the prodding of the Department of Finance (DOF), passed the initial package of revisions. According to DOF, the Tax Reform for Acceleration and Inclusion (TRAIN) is intended “to correct a number of deficiencies in the tax system to make it simpler, fairer, and more efficient.” The TRAIN has become effective on January 1, 2018.

True to the TRAIN’s objective, the initial package revisits the income taxation regime of individual taxpayers. For simplicity and administrative convenience, the TRAIN introduces a simplified gross taxation system as an alternative to net income taxation under the CTRP. However, this is only available to small taxpayers, in particular those self-employed individuals and professionals whose gross sales or receipts are below the VAT threshold. Exempt taxable income has been increased in place of certain deductions and exemptions, which require substantiation and record-keeping requirements. In terms of reporting requirements, the TRAIN limits the information that should be reflected in tax returns and the frequency in filing them. Except for VAT, the TRAIN no longer authorizes monthly returns. Instead, it requires quarterly filing of tax returns. The TRAIN extends filing of the first quarter returns of individuals and estates and, consequently, the payment of corresponding taxes. It also extends the due date on the second installment payment of income tax due. It has adjusted the threshold for compliance with more rigorous requirements, and mandated the BIR to implement simplified business registration and other tax compliance requirements. With the formal adoption of the substituted filing scheme under the TRAIN, pure compensation earners will continue to be spared from filing income tax returns.

While progressivity has been the system of taxation, its essence has somehow been diluted with the passage of time. The tax brackets of the CTRP were unable to adjust to inflation. The distinction between low and high-income earners was stark some twenty years ago, but had been effectively obliterated as two decades went by. This made the system unfair. The revised schedule of tax brackets under the TRAIN restored the distinction and generally reduced income taxes. The rate of withholding tax would be adjusted beginning in 2019 to account for the reduced taxes. While the TRAIN increased the top rate, the same would only apply to the so-called ultra-rich. In theory, they have less utility for and consequently should pay more tax on their excess income. This was also the reason for the increase in tax on fringe benefits, which were considered to be generally enjoyed by high-income earners.

In order to encourage payment of taxes, the TRAIN significantly reduced the tax on gratuitous transfers. However, it mandated the periodic revision of zonal values. It also adjusted VAT thresholds to take into account previous increases in prices, and reflected additional VAT exemptions to implement legislative policies on certain transactions. These amendments were generally meant to benefit taxpayers.

To recoup the loss in tax revenues from the above-described reforms and ultimately generate the needed funds for the Government’s infrastructure and social development programs, the TRAIN increased or imposed excise tax on certain consumer products and services. It also increased the tax on certain transactions, such as the DST, the tax on interest on foreign currency deposits and transfers of shares.

Finally, to make the tax administration more efficient, the TRAIN strengthened the powers of the BIR. It increased the penalties for tax evasion and related offenses. For proper balance, the TRAIN placed safeguards in favor of innocent taxpayers. In order to plug a loophole in the VAT system, the law conditionally eliminated the system of effective-zero rating. In this manner, exporters would be the ones and not their suppliers to claim for refund of their unutilized input VAT. Cognizant of the lengthy process of claiming a refund, the law provided measures meant to expedite the refund process. In essence, the law shifted from a “deemed denied” to a modified “deemed approved” scheme. In particular, the TRAIN mandated the BIR to grant refunds within a shortened 90-day (from the previous 120-day) period. However, if the refund was not proper, the BIR must state in writing the specific reasons why the claim


should not be granted. The law provided criminal sanctions on BIR officers who deliberately fail to act on VAT refund claims.

While the initial package is meant to affect individual taxpayers, the same introduced changes that affect tax reporting of corporate taxpayers. Like their individual counterpart, their tax returns have been simplified. They are no longer required to file monthly returns except for monthly compensation withholding tax returns. They are only mandated to file returns for withholding tax, VAT or percentage tax on a quarterly-basis. However, they will continue to pay VAT and, consequently, must file the corresponding return on a monthly basis until the year 2022.

The TRAIN in some aspects is not self-executing. The DOF needs to provide certain implementing details and, for certain provisions, their precise date of implementation.

“All the Taxpayer Needs to Know About the TRAIN Law” attempts to present details of these changes in a timely fashion. They are grouped under the relevant Chapters on: personal income tax, transfer taxes, business taxes, excise taxes and administrative provisions. The Frequently Asked Questions format is adopted to assist readers in easily understanding the impact of the TRAIN on them and their affairs. A copy of the TRAIN, the accompanying veto message of the President and the available administrative issuances as of the publication of this work are presented as Annexes, for immediate references.

As mentioned, the DOF or the BIR will issue a series of implementing details or guidelines. It is likely that there will be divergence on what is presented in this work and in such implementing details or guidelines. It is common for the views of practitioners and regulators to differ on important issues, and it is up to the concerned taxpayers to question the regulators’ view. It should also be noted that there are pending questions on the validity of the TRAIN and the President’s veto on certain provisions. It is possible that some affected taxpayers will file cases in court. In either case, this work may be useful to them. Whatever view I have or discussions in this work do not bind ACCRA or any of my partners with regard to cases that they will handle in the future. My views may also change, considering developments in tax practice and jurisprudence. I take responsibility for any error or omission in this work.

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