The Pros and Cons of the Proposed Tax Reform in the Philippines

For years, Filipino workers have complained about the country’s high tax rates while getting what they perceive as low-quality public services.

The present government under President Rodrigo Duterte recently unrolled a sweeping tax reform proposal that is seen to impact all economic sectors. Known as TRAIN (Tax Reform for Acceleration and Inclusion), the proposal has been approved without changes by the lower house of Congress, and is currently under review by the upper house or Senate.

While the program has been lauded by some sectors, there are those who oppose it and say that it may, in fact, have a negative impact among the lowest-earning citizens.

Here’s a brief look at TRAIN and the pros and cons as expressed by economic experts, as well as ordinary workers and businessmen.

TRAIN’s salient points

TRAIN is broken down into 5 “packages,” as follows:

  •  Package 1: Aims to lower income tax rates
  • Package 2: Aims to decrease corporate income tax rates while rationalizing/restructuring fiscal tax incentives
  • Package 3: Reform property taxation
  • Package 4: Reform capital income taxation
  •  Package 5: Implements measures to mitigate government income losses from Packages 1 to 4

These are some of the program’s highlights:

  • Those earning P250,000 annually and below will be exempted from paying income taxes. Those earning more than P20,000 to P40,000 a month can enjoy as much as 70% reduction from their current tax bills.
  •  Those earning more than P5 million a year will pay a higher tax rate of 35% instead of the current 32%
  • The cap for tax exemption eligibility on 13th month pays and other bonuses was raised to P100,000 from P82,000
  •  Corporate taxes will be lowered to 25% from the current 30%
  • VAT zero rating will be limited to direct exporters. Local suppliers to exporters will now be subject to VAT but will get a refund within 90 days.
  •  Other existing VAT exemptions repealed by TRAIN include rental properties earning less P10,000 a month and electric cooperatives
  • Instead of paying quarterly net income taxes, small businesses only need to pay an 8% tax on gross income once a year
  •  Property valuation to determine property taxes will be computed closer to market values
  •  Excise taxes will be imposed on petroleum products
  •  Higher excise taxes will be imposed on automobiles
  •  Higher excise taxes will be imposed on sugar-sweetened beverages

Pros and cons of TRAIN

Advocates and opponents of TRAIN point out the following potential benefits and negative impacts of the program:

Potential benefits:

  •  Higher take-home pay and therefore improved spending power, particularly for those earning P40,000 a month or less
  •  Better income rate after taxes for corporations
  • More efficient tax collection
  •  Offsetting measures said to affect the most affluent businesses and individuals will generate income that will be used in the government’s aggressive infrastructure projects and in improving basic services, such as housing, education, and “social protection”

Potential negative impact:

  • Inflationary effects of higher petroleum prices that are seen to mostly affect the bottom 60% of households. The government aims to offset these effects with a “transfer scheme” that will allocate around P30 billion from petroleum excise taxes to support the bottom sectors. This scheme has been criticized, however, for being unsustainable – projected to last only one to four years – and a “logistical nightmare.”
  •  Excise taxes on sugar-sweetened drinks will burden the bottom sectors, particularly those who are already tax exempt under the current taxation system, and therefore will not benefit from the lowered tax rates
  •  Higher property taxes due to higher property valuation
  • Investors who are looking to benefit from PEZA (Philippine Economic Zone Authority) incentives may be discouraged by the removal or restructuring of some of these incentives
  •  VAT on low-rental housing may lead to higher rental costs
  •  For small businesses like sari-sari stores, being taxed on gross income rather than net income (computed after expenses) can mean higher tax payments