The much anticipated Tax Reform for Acceleration and Inclusion (TRAIN) program has finally gained foothold in the Senate. Last September 20, the Senate Committee on Ways and Means officially endorsed Senate Bill 1592, its version of the tax reform package proposed by the Executive Branch. The said bill raises the take home pay of 99% of the individual income taxpayers in the country and exempts about 64% of all local workers — roughly 3.192 million Filipinos — from paying income tax.
The TRAIN bill will undergo plenary deliberations and is expected to be passed by the Senate in October. The Department of Finance (DOF) eyes to have the tax reform plan signed into a law by December 15 and implemented by January 2018. If it sees the light of day, the TRAIN is expected to rake in about Php134 billion in revenue and will be the first amendment of the country’s income tax law after 20 years.
How will the Senate’s version of TRAIN change the country’s income tax system? What’s exactly in store for HR leaders like us and for the employees we serve? Let’s take a look at some of the key parts of the bill and find out.
Tax exemption for first Php150,000 annual taxable income
The Senate’s proposed TRAIN program provides complete exemption for the first Php150,000 annual taxable income and retains the Php82,000 tax exemption for 13th month pay and other bonuses. It also sets the maximum additional tax exemption for up to four dependents at Php100,000. This gives a worker with four dependents an approximate tax-free monthly income of Php25,000.
To further illustrate the proposed reform’s impact, the Senate gave two examples: the case of a teacher with a monthly income of around Php17,254 and two dependents, and that of a call-center agent who makes about Php16,136 but has no dependent. Both are currently taxed at 20%. If the TRAIN gets implemented, the teacher will no longer be charged of any income tax. On the other hand, the call-center agent’s annual income tax due will be reduced from Php20,576 to Php4,557.
The Senate’s version of TRAIN differs from House Bill 5636, the House of Representatives’ proposed tax reform bill, which was passed last May 31. In an earlier article, we discussed that the HB 5636 exempts employees with an annual income of Php250,000 or below from paying income taxes. The Lower House’s version also raises the tax-exempt ceiling for 13th month pay from Php82,000 to Php100,000.
Below are the income tax rate tables of the two TRAIN bills as well as the one that we currently follow.
Source: Tax Code of the Philippines
Source: House Bill 5636
Source: Senate Bill 1592
More tax arrangement options for self-employed individuals and professionals
The Senate-endorsed TRAIN program also includes an 8% flat tax rate on gross sales and receipts for self-employed individuals and professionals. But this is just an option. People like doctors, lawyers, freelancers, and micro/small/medium business owners can still opt to pay their income tax based on the tax rate table in the bill. Having the privilege to choose the more favorable arrangement is supposed to encourage them to pay their income taxes correctly. To make things even easier, the TRAIN also provides that they report their income taxes only once a year instead of the current quarterly filing.
Marginal income earners, or those who derive gross sales or receipts not exceeding 100,000, will be exempt from paying income taxes. This provision will be of huge benefit to farmers, fishermen, small sari-sari store owners, market vendors, and tricycle drivers.
Regular adjustment of tax rates
In the same TRAIN bill, tax rates will be adjusted upwards every three years beginning 2021 based on inflation to account for bracket creep. As stated in the bill, the Cumulative Price Index (CPI), published by the Philippine Statistics Authority (PSA), through the rules and regulations issued by the DOF, will be used to fulfill this provision.
VAT threshold raised to Php3 million
Finally, the TRAIN proves to be as appealing to most entrepreneurs as it is to employees because of one thing: its provision on the Value-Added Tax (VAT) exempt threshold on the sale of goods and services. It raises the said threshold from Php1.9 million to Php3 million — exempting businesses whose total annual sales are at Php3 million and below from paying VAT.
This tax relief will benefit micro, small, and medium enterprises, which, according to the Senate, represent 98% of all registered businesses in the country. Allowing businesses to thrive paves the way for more infrastructure and jobs, which extends the benefits of TRAIN to the unemployed and non-taxpayers.