What does the tax reform bill mean for me?

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Tax reform is about simplifying the tax code and lowering taxes on beneficial activities while reducing tax leakages, or loss of revenue, and raising taxes on harmful activities. Illustration by JL JAVIER

Editor’s note: Pierre Martin Reyes is a lawyer, a tax law professor at the Far Eastern University Institute of Law, and a consultant of the Office of the Senate President. The views expressed in this commentary are his own.

Manila (CNN Philippines Life) — The Tax Reform for Acceleration and Inclusion (TRAIN), the first package of the Duterte administration’s comprehensive tax reform program, is almost at its final station. With the ratification by the House and Senate of its final version last week, the bill now moves to the President for his signature. In the coming days, we can expect to hear plenty of analysis and comments from various perspectives as to how it impacts the Filipino people and the economy. To that, I offer my point of view.

Tax reform is about simplifying the tax code and lowering taxes on beneficial activities while reducing tax leakages, or loss of revenue, and raising taxes on harmful activities. Here’s what TRAIN does towards that end.

First, the reform increases the income tax exemption threshold and adjusts the income tax rates and tax brackets to ensure that Filipinos will have higher disposable income. It is a realization that the economy cannot grow and prosper by squeezing out taxes from the middle class. Instead, government must reinvigorate and expand the middle class as a bedrock of prosperity.

The tax reform program now exempts from income tax those with an annual taxable income of not over ₱250,000. Under the existing tax code, those earning over ₱500,000 a year are paying the same rate as high-income earners at ₱125,000 plus 32% of the excess over ₱500,000. Under TRAIN, those earning ₱400,000 but not over ₱800,000 would be paying income tax at ₱30,000 plus 25% of the excess over ₱400,000. Beginning 2023, the rates will automatically adjust to further lower the income tax rates. The exemption of 13 month pay and other bonuses has likewise been increased from ₱82,000 to ₱90,000.

Second, TRAIN introduces an optional flat tax or a single rate of income tax to give relief to self-employed and professionals (SEPs). The current tax code disfavors the self-employed and professionals. It’s about time that government gives them, particularly small business owners, a boost and put them at the heart of our economy.

Ultimately, it is about choice — giving taxpayers greater control over how their hard-earned money is saved or spent.

Previously, self-employed and professionals pay income tax at the same five to thirty-percent income tax schedule. With the new program, those with gross sales or gross receipts that do not exceed the new value-added tax (VAT) threshold of ₱3,000,000 have the option to use the new tax schedule or an eight percent flat tax on gross sales or receipts in excess of ₱250,000. If they choose the eight percent flat tax, they will be exempt from the three percent percentage tax. Regardless of their choice, SEPs whose gross sales or receipts do not exceed ₱500,000 will be exempt from the three percent  percentage tax.

Third, the new program lowers the estate tax rate to a single rate of six percent with a standard deduction of ₱5,000,000 and a family home exemption of up to ₱10,000,000. The estate tax can now be paid within a year and an installment within two years is provided. Furthermore, the heirs can now withdraw from the decedent’s bank accounts provided they pay a withholding tax. These reforms ensure that capital will not be locked in unsettled estates and enable heirs to leverage inherited property into wealth.

Fourth, the new tax program makes significant headway in reducing the tax leakages caused by the multitude of VAT exemptions in our tax system. Tax leakages pertain to revenue losses due to loopholes in a tax system such as special treatments to various industries in the form of VAT exemptions. While TRAIN repeals 54 of these exemptions, government should continue to reduce, or better yet, eliminate these special treatments to keep the VAT system as simple and efficient as it was intended to be. As a principle, only those VAT exemptions where the benefits to society exceed the costs of the foregone revenue should remain. Thus, TRAIN retains the exemption granted to senior citizens and persons with disabilities, increases the VAT exemption on monthly rentals from ₱10,000 to ₱15,000, and exempts the sale of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension.

Finally, this new tax reform seeks to generate revenue by increasing or imposing tax on activities that cause undue harm. Excise taxes are taxes paid on the production, sale or consumption of particular commodities or activities. Other than generating revenue, these are used as tools to influence social behavior. Considering their environmental impact, TRAIN doubles the mining taxes and increases the coal tax from ₱10 per metric ton to ₱50-₱100-₱150 on a three-year period. This modest coal tax increase will have minimal impact on electricity prices but will be sufficient enough to encourage investments in renewable energy.

Tax reform is a continuous process, not a one-time event.

TRAIN also increases the excise taxes on petroleum products in staggered amounts in a three-year period and the excise tax on automobiles while providing incentives for hybrid and electric vehicles. This is to promote eco-friendly vehicles and to steer the shift from private to public transport in line with the government’s investments in transport infrastructure.

Under the new tax program, cigarettes and sweetened beverages will become more expensive. The excise taxes on cigarettes will gradually increase from the current ₱30 per pack to ₱32.50 next year and as high as ₱40 in 2020 while a new excise tax on sweetened beverages is introduced at either ₱6 or ₱12 per liter depending on the sweetener used. This is to promote a healthy lifestyle by discouraging smoking and the high consumption of sweetened beverages.

TRAIN also imposes an excise tax on invasive cosmetic procedures, surgeries and body enhancements which are directed solely to improve, alter or enhance one’s appearance and which do not meaningfully promote the proper function of the body or prevent or treat illness or disease. While such procedures do not directly harm others, harm is caused because it sets standards of beauty that people must now spend on.

Various safeguards have been introduced on these impositions to mitigate any adverse impact, such as suspension of petroleum excise tax increases if price of oil reaches $80 per barrel, key exemptions for sweetened beverages, and other social measures.

Ultimately, it is about choice — giving taxpayers greater control over how their hard-earned money is saved or spent.

Could more have been done better? Certainly. The new tax reform program is not perfect, but it must be viewed in the context of a comprehensive tax reform plan. Tax reform is a continuous process, not a one-time event. As one proverb says, “To get through the hardest journey, we need take only one step at a time, but we must keep on stepping.” It is the initial step towards a fairer, simpler, and more efficient tax system, and the next train is on its way.