Chugging along with the TRAIN
2018 got a jump-start with Republic Act No. 10963 (otherwise known as the Tax Reform for Acceleration and Inclusion or TRAIN), which took effect on the first day of the year.
As most readers may be aware, the TRAIN amended several provisions of the National Internal Revenue Code of 1997 (Tax Code), which include individual income taxation, individual and corporate passive income taxation, estate tax, donor’s tax, value-added tax ( VAT), excise tax and documentary stamp taxes.
A number of employees enjoyed higher take home pay due to the adjusted personal income tax rates. On the downside, however, the inflation rate appears to have risen, driven by the increase in prices of gasoline, sweetened beverages, and other commodities affected by the increased/new taxes. This has resulted in worries about the possible insufficiency in the take-home pay of ordinary Filipinos to cover actual and foreseeable surges in commodity prices.
There are also some interpretations of the TRAIN provisions which are highly debated, such as the preferential rate of employees of certain entities, and the correct tax treatment of registered enterprises within a separate customs territory, especially when an effective VAT refund system is implemented.
But there are also some “less noticeable” items under the TRAIN that are hardly mentioned in news reports or public forums that may require attention due to some features which may create confusion or stir controversy. Based on my observation, examples of these are below: • Selective application of increase in certain passive income tax rates TRAIN increased certain passive income tax rates but these changes were not equally applied to all types of taxpayers. Examples of these are as follows:
a. Philippine Charity Sweepstakes and lotto winnings exceeding P10,000 by citizens and resident aliens are now subject to 20% final income tax but winners who are nonresident aliens engaged in trade or business remain tax exempt regardless of amount.
b. While the interest income from a depository bank under the expanded foreign currency deposit system earned by domestic corporations is now subject to 15% final income tax, the same interest income earned by resident foreign corporations remains subject to 7.5% final income tax.
c. Capital gains on the sale of shares not traded in the Philippine Stock Exchange realized by domestic corporations are currently taxed at 15% final income tax. But these gains will still be taxed at 10% final tax (5% on the first P100,000 net capital gains) if realized by foreign corporations.
One may wonder whether the partiality in the imposition of increased income tax rates on certain types of taxpayers was really intended by Congress. Even assuming that the distinction in the imposition of taxes is based on reasonable grounds, taxpayers should nonetheless exercise caution in applying the correct income tax rates as an underpayment can unexpectedly result in penalties, or to a refund/ tax credit claim in case of overpayment. • Non-recognition of certain income tax exclusions Prior to the TRAIN, Section 32(B)(7)(f ), ( g) and ( h) of the Tax Code specifically mention the following items as income tax exclusions:
a. GSIS, SSS, Medicare and Pag-IBIG contributions, and union dues of individuals;
b. Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than 5 years; and
c. Gains realized by the investor upon redemption of shares of stock in a mutual fund company.
However, it appears that the foregoing exclusions were not replicated under the TRAIN. The symbol “xxx,” normally used to indicate the adoption of existing provisions of the Tax Code being amended, was not reflected.
The absence of the items may be interpreted in two ways, i.e., either the Congress intended to repeal these provisions or the omission was a mere oversight. If the intention was to repeal, then this should have been highlighted during the tax reform hearings for purposes of transparency; moreover, the enrolled bill of the TRAIN should have expressly indicated the intended deletion of these provisions to dispel ambiguous interpretation of the law. Thus, more likely than not, this appears to be an oversight. • Reversion to old VAT threshold exemptions for real estate In 2005, the sale of residential lots not exceeding P1.5 million and house and lots and other residential dwellings not exceeding P2.5 million were considered VAT- exempt. Thereafter on Jan. 1, 2012, the VAT thresholds were increased to P1,919,500 and P3,199,200 respectively pursuant to Revenue Regulations No. 16-2011. However, upon effectivity of the TRAIN, the VAT thresholds have been reset to their original values prior to 2012 (i.e., P1.5 million and P2.5 million respectively).
It is not likely that Congress had overlooked the increase in real estate values due to upward adjustments caused by inflation in the past. Musing over the reversion, one can speculate that this was also likely a mere oversight. Even with the increased thresholds in 2012, some may have doubts whether the indicated values in the law are still reflective of present market situations.
Given the amendments, taxpayers should be careful to take note of the reversal in threshold exemption while engaging in the sale of residential real property.
The items above are merely some of my observations. Perhaps, if others carefully examine the TRAIN provisions, they can further pinpoint other provisions that may be considered confusing, equivocal, or misplaced as to require amendatory or corrective actions by the legislators.
While the TRAIN has brought on mixed feelings from the public, which I likewise share, taxpayers should remain optimistic that the tax law can be further improved as the drafting of the next phase of tax packages are ongoing.
When a train goes through a tunnel and it gets dark, you don’t throw away the ticket and jump off. You sit still and trust the engineer. While it is scary to not see the big picture when it comes to the ultimate direction of the tax reforms, we should still look forward to the government’s promise that it has every intention to improve the quality of life of Filipinos. Riding along with the government for better tax reform is what we should aim for.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.