ONG I PHUIPPINE HISTORY —_ - ‘Chapter 13 —stssCCarp naire waivays ne MAW ete usr na tHeigaa 8 arargah ra oaghnghod at ‘ € rama st ‘arinindigon 3 papoose .." but in this world nothing can be said to be certain, except death and taxes.” — Benjamin Franklin ‘Learning Outcomes: At the end of this chapter, the student is expected to: 1. Effectively communicate, using various techniques and genres, historical analysis of a particular event that could help others understand the chosen topic; 2. Propose recommendation or solutions to present day problems based on their _ understanding of root causes, and their anticipation of future scenarios; 3. Display the ability to work in a multi-disciplinary team and contribute to a group endeavor. Chapter Outline: 1. What is ‘Taxation’? 2. Philippine Taxation 3. Legal Bases of Philippine Taxation 4. Kinds of Taxes 5. Brief History of Philippine Taxation 6. What is the Tax Reform Program? 7. What is the TRAIN Law?READINGS IN PHILIPPINE HISTORY 1. What is ‘Taxation’? Taxation refers to compulsory or coercive money collection by a levying authority, usually a government. The term “taxation” applies to all types of involuntary levies, from income to capital gains to estate taxes. Though taxation can be a noun or verb, it is usu 3 referred to as an act; the resulting revenue is usually called “taxes.” (Investopedia, 2016) — Taxation isa means by which governments finance their expenditure by imposing charges on citizens and corporate entities. Governments use taxation to encourage or discourage certain economic decisions, For example, reduction in taxable personal (or household) income by the amount paid ag. interest on home mortgage loans results in greater construction activity and generates, more jobs. (Business Dictionary, n.d.) Taxation refers to the practice of a government collecting money from its citizen to pay for public services. Without taxation, there would be no public libraries or parks. One of the most frequently debated political topics is taxation. Taxation is the practice of collecting taxes (money) from citizens based on their earnings and property. The money raised from taxation supports the government and allows it to fund police and courts, have a military, build and maintain roads, along with many other services. Taxation is the price of being a citizen, though politicians and citizens often argue about how much | taxation is too little or too much. (Vocabulary, n.d.) Taxation is different from other forms of payment, like payment for a purchase of goods or services, because taxation does not require consent from the payor and the payment is not directly tied to any goods bought or services rendered. The government - compels taxation through an implicit or explicit threat of force— through penalties and/or imprisonment. Taxation is legally different than extortion or a protection racket because the imposing institution is a government, not private actors. q Tax systems have varied considerably across jurisdictions and time. In most modern systems, taxation occurs on both physical assets, such as property, and specific events, suchas a sales transaction. The formulation of tax policies is one of the most critical and contentious issues in modern politics. (Investopedia, 2016) 2. Philippine Taxation What are taxes? hy According to the Department of Finance, Republic of the Philippines, taxes are mandatory contributions of everyone to raise revenue for nation-building, The revenue is used to pay for our doctors, teachers, soldiers, and other government personnel and officials, as well as for building schools, hospitals, roads, and other infrastructure. It is our.duty to pay our taxes.READINGS IN PHILIPPINE HISTORY ‘Why does the government collect taxes? The government collects taxes to provide basic services such as education, health, | infrastructure, and other social services for all, These taxes are used to pay for our doctors, teachers, soldiers, and other government personnel and officials. These are also used to build schools, hospitals, roads, and various infrastructure for connectivity, and industrial and agricultural facilities. Who pays taxes? We all pay taxes, either directly or indirectly. We pay taxes according to our income and/or level of consumption. Income tax is based on the ability-to-pay principle wherein people with higher - income should pay more. Consumption tax is based on the amount of goods and services utilized such that the more you consume, the higher the tax you pay. Filipinos residing in the Philippines are taxed based on income earned here and abroad. In the case of Filipinos living abroad, they.are only taxed based on their income earned in the Philippines. Similarly, resident aliens and ‘non-resident aliens in the Philippines are taxed based on their income earned in the country. Where do my taxes go? Taxes are used to fund social services and investment in infrastructure and human capital development. Part of our taxes get directly transferred to the poorest through targeted transfers (e.g. 4Ps, pension to qualified senior citizens, allowance for PWDs, and PhilHealth). 3. Legal Bases of Philippine Taxation The policy of taxation in the Philippines is governed chiefly by the Constitution of the Philippines and three Republic Acts. Article VI, Section 28 of the Constitution states that “the rule of taxation shall be uniform and equitable” and that “Congress shall evolve a progressive system of taxation.” Find a copy of the original document at this site: _ hitp:/ /www officialgazette.gov.ph/constitutions/the-1987-constitution-of-the-republic- _ of-the-philippines/the-1987-constitution-of-the-republic-of-the-philippines-article-vi/ = https:// www .lawphil.net/consti/cons1987.html F, b.'National Law 1. National Internal Revenue Code—enacted as Republic Act No, 8424 or the Tax » Reform Act of 1997; Find a copy of the original document at this site:READINGS IN PHILIPPINE HISTORY http:/ /www.officialgazette gov.ph/1997/12/11/republic-act-no-8424/ 2. Subsequently amended by Republic Act No, 10963 or the Tax Reform for ‘Acceleration and Inclusion Act of 2017; Find a copy of the original document this site: http://www officialgazette.gov.ph/2017/12/27/republic-act-no- 10963/ 3. Republic Act No. 7160 or the Local Government Code of 1991, and those sourced from the proceeds collected by virtue of a local ordinance. Find a copy @ the original document at these sites: https:/ /www.lawphil.net/statutes/repacts/ra1991/ra_7160_1991.html and http://www.officialgazette.gov.ph/1991/10/10/republic-act-ito-7160/ Taxes imposed at the national level are collected by the Bureau of Internal Revent (BIR), while those imposed at the local level (ie., provincial, city, municipal, barangay) ai collected by a local treasurer's office. The powers and duties of the Bureau of Internal Revenue are: 1, Reduction and collection of all internal revenue taxes, fees and charges; a 2. enforcement of all forfeitures, penalties, and fines connected there including the execution of judgments in all cases decided in its favor by tf Court of Tax Appeals and the ordinary courts; i + 3. It shall also give effect to the administer supervisory and police p conferred to it by the National Internal Revenue Code and special laws. 4. Kinds of Taxes According to the Department of Finance, Republic of the Philippines, taxes ca either be direct or indirect. z Direct taxes are those that are paid from your income and properties. Example include personal and corporate income taxes, property and capital taxes. 7 Indirect taxes are collected based on consumption. Examples include excise ta VAT, percentage tax, and documentary stamp tax (DST). a. Direct Taxes 1. Income Tax Income tax is a direct tax paid by an individual or organization imposed on: © Compensation Income - Salaries, wages, taxable bonuses, fringe bene and other allowances © Business Income - Practice of profession, trades, gains from sale of ass and other income not covered by compensation * Passive Income - Tax on deposits, royalties, and dividendsREADINGS IN PHILIPPINE HISTORY ‘Compensation and self-employment income F Individuals earning compensation income are taxed based only on the income tax schedule for individuals. On the other hand, self-employed individuals and professionals are taxed based on the income tax schedule for individuals, applicable percentage taxes, and value-added tax (VAT). However, if their gross sales (or gross receipts plus other non- operating income) does not exceed the VAT threshold, they have the option to be taxed either on the basis of the income tax schedule for individuals and the applicable percentage taxes, or just with a flat tax rate of 8% on their gross sales (or gross receipts plus other non- operating income). if Income tax schedule for Individuals effective FY 2018 until FY aoa —} +P2,000,000 [a 8,000, 000 490,000 ,000 + 32% of the excess over P2,000,000 8.000.000 | ; | 2,410,000 + 35% of the excess over PB,000,000 _ interests, royalties, prizes and other winnings Interest income from bank deposits, deposit substitutes, trust funds, and other " Similar products (except for its long-term variants) is taxed at the rate of 20%. Royalties, except on books, literary works and musical compositions, are taxed at the rate of 10%. Prizes and winnings from Philippine Charity Sweepstakes Office (PCSO) Lotto in __€xcess of P10,000 (upon which individual prizes and winnings P10,000 or below are taxed ‘on the basis of the income tax schedule for individuals) are taxed at the rate of 20%. Interest income from a depository bank under the expanded foreign currency deposit system is taxed at the rate of 15%. Income from long-term deposits and investments, when pre-terminated in less _ than three years after making such deposit or investment, is taxed at the rate of 20%; less _ than four years, 12%; and, less than five years, 5%. Cash and property dividends are taxed at the rate of 10%.READINGS IN PHILIPPINE HISTORY Capital gains f Capital gains from the sale of shares of stock not traded in stock exchange are taxed at the rate of 15%. Capital gains from the sale of real property are taxed at the rate of 6%, except when such proceeds would be used to construct a new property within eighteen months after: the sale had occurred. Income tax for corporations The income tax rate for corporations is 30%. b. Indirect Taxes 1, Value-Added Tax Value-Added Tax is a type of indirect tax imposed on goods and services. It is typically passed on to the buyer as part of the selling price. The value-added tax (VAT) rate since 2006 is 12%. Both imported and domestic goods and services are covered VAT, but there are many exemptions, The list of exemptions can be found in Section 109 of the Tax Code 2. Percentage tax Percentage tax is a business tax imposed on persons or entities/ transactions: who sell or lease goods, properties or services in the course of trade or business and are from value-added tax (VAT) under Section 109 (w) of the National Internal Revenue Code, as amended, whose gross annual sales and/or receipts do not exceed Php 1,919,500 and who arenot VAT-registered; and ‘engaged in businesses specified in Title V of the National Internal Revenue Code. 3. Excise tax 3. Excise tax is an indirect tax on selected goods that have negative externalities. and are non-essentials. Excise tax can be either specific or ad valorem. + Specific is based on weight, volume capacity, or any other physical unit _ of measurement. © Ad valorem (literally meaning “according to value”) is based on selling ~ price or other specified value This is a measure to discourage too much consumption of scarce resources and limit the bad effects. of moana products. These are the commodities subject to.excise taxes: Sin products (alcohol and tobacco), petroleum, miscellaneous articles (automobiles, jewelry, perfume, and toilet waters, yachts, and other vessels intended for pleasure or sports), and mineral products.READINGS IN PHILIPPINE HISTORY Taxes can also be classified as to who imposes them, either the National Government or the Local Government (LGU) ¢. National Taxes The taxes imposed by the national government of the Philippines include, but are not limited to: Income tax (Compensation, Business, Passive) Estate tax; Donor's tax; Value-added tax; Percentage tax; Excise tax; and Documentary Stamp tax occ eeece d. Local Taxes One of main sources of revenues of the local government units is the real property tax, which is a tax imposed on all types of real properties including lands, buildings, improvements, and machinery. Another source of revenue are local ordinances such as parking fees and the like. References: “The Constitution of the Republic of the Philippines.” Official Gazette. Retrieved 8 January 2018. “Republic Act 8424—Tax Reform Act of 1997.” The Lawphil Project. Retrieved 8 January 2018. “Republic Act 10963—Tax Reform for Acceleration and Inclusion Act of 2017” (PDF). Official Gazette. Retrieved 8 January 2018. “Republic Act 7160—Local Government Code of 1991.” The Lawphil Project. Retrieved 8 January 7 2018. “12% VAT now in effect.” GMA News. 1 February 2006, Retrieved 8 January 2018. E f-Teation in the Philippines,” 2018) 5. Brief History of Philippine Taxation se During the 17th and 18th centuries, the Contador de’ Resultas served as the Chief al Accountant whose functions were similar to the Commissioner of Internal Revenue . He was the Chief Arbitrator whose decisions on financial matters were final except ‘ revoked by the Council of Indies. During those times, taxes that were collected from inhabitants varied from tribute or head tax of one gold maiz annually; tax on value of and gold trinkets; indirect taxes on tobacco, wine, cockpits, burlas and powder. 231 —18 w N READINGS IN PHILIPPINE HISTORY. From 1521 to 1821, the Spanish treasury had to subsidize the Philippines in the amount of P 250,000.00 per annum due to the poor financial condition of the country, which can be primarily attributed to the poor revenue collection system. (Wikipedia, = American era In the early American regime from the he period 1898 to 1901, the country was ruled by American military governors. In 1902, the first civil government was established under William H. Taft. However, it was only during the term of second civil governor Luke E, Wright that the Bureau of Internal Revenue (BIR) was created in July 2, 1904. On August 1, 1904, the BIR was formally organized and made operational under the Secretary of Finance, Henry Ide (author of the Internal Revenue Law of 1904), with John S. Hord as the first Collector. The second American collector was Ellis Cromwell (1909-1912) The third American collector was William T. Holting (1912-1214). During his term, collections by the Real Estate and License Divisions were confined to revenue accruing to the City of Manila The fourth American collector was James J. Rafferty asa). In line with the Filipinization policy of then US President McKinley, Flipis Collectors were appointed. The first three (3). BIR Collectors were: Wenceslao Trinidad (1918-1922); Juan Posadas, Jr. (1922-1934) and Alfredo Yatao (1934-1938): In 1937, the Secretary of Finance reorganizied the Provincial Inspection Districts and maintained in each province an Internal Revenue Office supervised by a Provincial Agent. (Wikipedia, 2018) Japanese era Under the Japanese regime (1942-1945), the Bureau was combined with the Customs Office and was headed by, a Director of Customs and’ Internal Revenme! (Wikipedia, 2018) Post-war era On July 4, 1946, when the Philippines gained its independence from the United States, the Bureau was eventually re-established separately. The country was divided into 31 inspection units, each of which was under a Provincial Revenue Agent and City Revenue Agent in distilleries and tobacco factories. In 1951, the withholding tax system was adopted by Republic Act (RA) 690. This method of collecting income tax upon receipt of the income resulted to the collection of approximately 25% of the total income tax collected during the said period. From 1954 to 1957, major reorganizations took place in the Bureau which creatett various offices, including the setting up of regional offices in Cebu and Davao in 1955, The Bureau’s organizational set-up expanded beginning 1956 in line with the regionalization scheme of the government. In January 1957, the position title of the head of the Bureau was changed from Collector to Commissioner. The last Collector and the first Commissioner of the BIR was } jTT REOINGS IN PHILIPPINE HISTORY Aranas. oS In 1958, the Tax Census Divigj Dine and tabi econ as established to consolidate all statements of we eee ter comes ‘idual and resident corporations in the Philippines On June 19, 1959 th e Rewards Law (RA No, 233) was passed to strictly enforce the : nt of taxes and to further di payme Iscourage tax evasion, wh i the 5% equivalent of the revenue collected from the ice formers wererewardes ee 7 See ieee Was sub-divided again into 15 regions and 72 inspection district ecily and home Board and Accountable Forms Committee were also created directly under the Office of the Commissioner. (Wikipedia, 2018) Marcos administration In 1965, Commissioner Misael Vera imy " plemented the “Blue Master Program” to curb the aes of both the taxpayers and BIR personnel; and the “Voluntary Tax Compliance Program" to encourage professionals in the private and government sectors to report their true income and to pay the correct amount of taxes. In 1970, each taxpayer was provided with a permanent Tax Account Number (TAN) which resulted into faster verification of tax records.” Similarly, the payment of taxes through banks, and the package audit investigation by industry were implemented. During the Martial Law years, several tax amnesty decrees were issued by the President to enable erring taxpayers to start anew. In 1976, the Bureau's National Office was transferred from the Finance Building in Manila to its own building in Quezon City. In 1977, President Marcos promulgated the National Internal Revenue Code of 1977, which updated the 1934 Tax Code. In 1980, Commissioner Ruben Ancheta further reorganized the Bureau (Wikipedia, 2018) | Aquino administration ‘After the EDSA Revolution in February 1986, “Operation: Walang Lagay” was “Jaunched to promote the efficient and honest collection of taxes. On January 30, 1987, Commissioner Bienvenido Tan, Jr reorganized the Bureau. In 1988, the value-added tax (VAT) was introduced. The adoption of the VAT sans one of the structural reforms provided for in the 1986 Tax Reform Program, was desi to simplify tax administration and make the tax system more itable. | | iesioner Jose Ong improved tax collection and simplifed tax ere "Account Number (TAN) was replaced by the Taxpayer Fenine Number (TIN) and adopted the New Payment Control System and i iNet Income Taxation Scheme. (Wikipedia, 2018) 233N wo 12! READINGS IN PHILIPPINE HISTORY. Ramos administration In 1993, Commissioner Liwayway Vinzons-Chato implemented the Action. — Centered Transformation Program (ACTS) to realign and direct the entire organization ° towards the fulfillment of its vision and mission. In 1994, a five-year Tax Computerization Project (TCP) was undertaken which ; involved the establishment of a modern and computerized Integrated Tax System and Internal Administration System. InJuly 1997, the BIR was further streamlined to support the implementation of the | computerized Integrated Tax System. (Wikipedia, 2018) { Estrada administration Commissioner Beethoven Rualo enhanced the voluntary compliance and implementated the Economic Recovery Assistance Payment (ERAP) Program, which granted immunity from audit and investigation to taxpayers who have paid 20% more than the tax paid in 1997 for income tax, VAT and/or percentage taxes. In 1999, the raffle promo “Humingi ng Resibo, Manalo ng Libo-Libo” was institutionalized to encourage consumers to demand sales invoices and receipts. In 2000, Commissioner Dakila Fonacier implemented the full utilization of tax 4 computerization in the Bureau's operations; expansion of the use of electronic’ Documentary Stamp Tax metering machine and establishment of tie-up with the national.” government agencies and local government units for the prompt remittance of withholding taxes; and implementation of Compromise Settlement Program for taxpayers: with outstanding accounts receivable and disputed assessments with the BIR. 4 ‘The Large Taxpayers Service (LTS) and the Excise Taxpayers Service (ETS) were established to reinforce the tax administration and enforcement capabilities of the BIR. The» BIR also implemented a Full Integrated Tax System (ITS) Rollout Acceleration Program to facilitate the full utilization of tax computerization in the Bureau’s operations. (Wikipedia, ” 2018) 9 Arroyo administration In 2001, Commissioner, Atty. René G. Bafiez implemented changes that made the the tax system simpler and suited to the Philippine culture, more efficient and transparent. He also implemented the Voluntary Assessment Program and Compromise Settlement Program and expansion of coverage of the creditable withholding tax system. A _ technology-based system that promotes the paperless filing of tax returns and payment of taxes was also adopted through the Electronic Filing and Payment System (eFPS). In 2002, Commissioner Guillermo L. Parayno, Jr. offered a Voluntary Assessment and Abatement Program (VAAP) to taxpayers with under-declared sales/ receipts/ income. He adopted the Reconciliation of Listings for Enforcement or RELIEF System to ‘detect under-declarations of taxable income by taxpayers and the electronic broadcasting system to enhance the security of tax payments. The BIR expanded its electronic services to include the web-based TIN application and processing; electronic raffle of invoices/receipts; provision of e-payment gateways; &- substituted filing of tax returns and electronic submission of sales reports.READINGS IN PHILIPPINE HISTORY High-profile tax evaders were sued under the Run After Tax Evaders (RATE) Program and cash register machines and point-of-sale machines were registered with the BR a ‘ In 2006, Commissioner Jose Mario C. Bufiag expanded the RATE Program to the Regional Offices; inclusion of new payment gateways, such as the Efficient Service Machines and the G-Cash and SMART Money facilities; implementation of the Benchmarking Method and installation of the Bureau's e-Complaint System, a new e- Service that allows taxpayers to log their complaints against erring revenuers through the BIR website. The Nationwide Rollout of Computerized Systems (NRCS) was also undertaken to extend the use of the Bureau's Integrated Tax System across its non- | computerized Revenue District Offices. In 2007, the National Program Support for Tax Administration Reform (NPSTAR), a program funded by various international development agencies, was launched to . improve the BIR efficiency in various areas of tax administration (i.e. taxpayer compliance, \ taxenforcement and control, etc.). (Wikipedia, 2018) In 2007, Commissioner Lilian B. Hefti embarked on data matching of income payments of withholding agents against the réported income of the concerned recipients. Information sharing between the BIR and the Local Government Units (LGUs) was aimed to uncover fraud and non-payment of taxes. Computer-Assisted Audit Tools and "Techniques (CAATTs) was used to enhance the Bureau's audit capabilities. In 2008, Commissioner Sixto S. Esquivias IV closed erring business establishments under the “Oplan Kandado” Program. ‘A Taxpayer Feedback Mechanism was also established where complaints on erring BIR employees and taxpayers who do not pay taxes and do not issue ORs/invoices can be reported. In 2009 Commissioner Joel L. Tan-Torres pursued a high visibility public awareness.campaign on the Bureau’s enforcement and taxpayers’ service programs. He institutionalized several programs to improve revenue collections. (Wikipedia, 2018) Aquino administration Under Commissioner Kim S. Jacinto-Henares, the BIR focused on the filing of tax evasion cases. The BIR was able to collect more than one-half of the total revenues of the ‘government. (Wikipedia, 2018) administration ‘ Rodrigo Duterte signed the Republic Act 10963 or the Tax Reform for Inclusion Acceleration Act of 2017, which lowered personal income tax rates but increased taxes F _ of certain goods, leading to a net increase in tevenue. This excess revenue will be used to © fund the major expansion in public infrastructure in the country. (Wikipedia, 2018) 235_ 6. What is the Tax Reform Program? by the Department of Finance, Republic of the Philippines _ READINGS IN PHILIPPINE HISTORY. We are redesigning our tax system to be simpler, fairer, and more efficient for all, while also raising the resources needed to invest in our infrastructure and our people. We will lessen the overall tax burden of the poor and the middle class. The Tax Reform for Acceleration and Inclusion (TRAIN) is the first package of the comprehensive tax reform program (CTRP) envisioned by President Duterte’s administration, which seeks to to correct a number of deficiencies in the tax system to make it simpler, fairer, and more efficient. It also includes mitigating measures that are designed to redistribute some of the gains to the poor. . Through TRAIN, every Filipino contributes in funding more infrastructure and social services to eradicate extreme poverty and reduce inequality towards prosperity for all. TRAIN. addresses several weaknesses of the current tax system by lowering and simplifying personal income taxes, simplifying estate and donor's taxes, expanding the value-added tax (VAT) base, adjusting oil and automobile excise taxes/and introducing excise tax on sugar-sweetened beverages. a. What Will the Tax Reform Fund? by the Department of Finance, Republic of the Philippines 1. Education The tax reform will be able to fund investments in education, achieving a more conducive learning environment with the ideal teacher-to-student ratio and classroom-to- student ratio: * Achieve the 100% enrollment and completion rates * Build 113,553 more classrooms * Hire 181,980 more teachers between 2017 and 2020, 2. Healthcare Services With the tax reform, we can invest more in our country’s healthcare by providing better services and facilities: © Upgrade 704 local hospitals and establish 25 local hospitals * Achieve 100% PhilHealth coverage at higher quality of services * Upgrade and/or relocate 263 rural and urban health units to disaster-resilient facilities * Build 15,988 new barangay health stationsN Build 2,424 new rural health units and urban health centers Between 2017 and 2022, hire an additional 2,424 doctors, 29,466 nurses, 1,114 dentists, 3,288 pharmacists, 2,682 medical technologists, 911 public health associates, and 2,497 UHC implementers 3. Infrastructure Programs | The additional revenue raised by the tax reform will be used to fund the | infrastructure program of the Department of Public Works and Highways (DPWH), which consists of major highways, expressways, and flood control projects. Funding these major infrastructure projects is possible with tax reform for our country to sustain high and ive growth. (Source: Department of Transportation) Funds will be raised for major infrastructure projects, including: + Bonifacio Global City-Ortigas Center Link Road + UP-Miriam-Ateneo Viaduct along C-5/Katipunan + Camarines Sur/Albay Diversion Road + Pulilan-Baliuag Diversion Road + Maasin City Coastal Bypass Road cum Sea Wall + Tatloban City By-Pass Road + Panay East-West Road + Dang Maharlika (Alternate Route) (NRJ-Mayor Democrito D, Plaza !! Avenue-Las Nieves-Sibagat), (Mandamo-Las Nieves Section) + Cagayan De Oro Diversion Road, Cagayan de Oro City + Valencia City-Pangantucan Diversion Road eal The tax reform program aims to provide the needed additional revenues that ould fund our country’s investment needs, promoting better lives for Filipinos, (Source: ippine Statistics Authority, Department of Public Works and Highways, and DOF staff ates) N w [2|—~ : READINGS IN PHILIPPINE HISTORY _ a 7. What is the TRAIN Law? by the Department of Finance, Republic of the Philippines TRAIN stands for Tax Reform for Acceleration and Inclusion. The Tax Reform for Acceleration and Inclusion (TRAIN) is the first package of the comprehensive tax reform program (CTRP) envisioned by President Duterte’s administration, which seeks to to correct a number of deficiencies in the tax system to make it simpler, fairer, and More efficient. The goal of the first package of the Comprehensive Tax Reform Program (CTRP) or TRAIN is to create a more just, simple, and more effective system of tax collection, as per the constitution, where the rich will have a bigger contribution and the poor will benefit more from the government's programs and services, The major features of the TRAIN are as follows: Lowering the Personal Income Tax (PIT) Simplifying the Estate and Donor’s Tax Expanding the Value-Added Tax (VAT) Base Increasing the Excise Tax of Petroleum Products Increasing the Excise Tax of Automobiles Excise Tax on Sweetened Beverages 4 Skene 238a READINGS IN PHILIPPINE HISTORY Lowering Personal Income Tax (PIT) TRAIN lowers personal income tax (PIT) for all taxpayers except the richest. Under TRAIN, those with annual taxable income below P250,000 are exempt from paying, PIT, while the rest of taxpayers, except the richest, will see lower tax rates ranging from 15% to 30% by 2023. To maintain progressivity, the top individual taxpayers whose annual taxable income exceeds P8 million, face a higher tax rate from the current 32% to 35%. Husbands and wives who are both working can benefit from a total of up to 500,000 in exemptions. In addition, the first P90,000 of the 13th month pay and other Donuses will be exempt from income tax. Overall, the effective tax rates will be lowered for 99% of tax payers. Currently, a person who has a taxable income of P500,000 annually is taxed at 32% at the margin. TRAIN will bring this down to 25% in 2018, and will be further brought down 20% after five years. Minimum wage earners will continue to be exempted from income taxes as their ~income falls below P250,000. In addition, the new tax structure will address the current problem wherein going a peso above the minimum wage will result in a lower effective take home pay, thereby discouraging minimum wage earners to accept incremental wage increases and keeping them in an artificial minimum wage trap. The simplified tax system will increase the take home pay of most individuals and encourage compliance. Self-employed and professionals (SEPs) with gross sales below the VAT threshold now have the option to pay a simpler 8% flat tax in lieu of income and percentage tax, while those above the VAT threshold will follow the PIT schedule. rT SCHEDULE 1 (2018-2022) Prt SCHEDULE 2 (2023 ONWARDS) Example: Meet John Cruz, a call center agent. John Cruz is a call center agent © with a family of three. He commutes from Montalban, Rizal to his office in Makati and |) leaves the house at 4:00 AM to avoid heavy traffic. He spends his daily on fare to and Tere Tas System from work, and on food for the family, and *#""" 273,000 monthly on household expenses such as. RES¥™" 136.166 electricity, water, and internet connection. ee On top of these expenses, he gets monthly salary deductions to pay for taxes under the antiquated tax system in place. This makes saving for the family difficult for John. 339nN [3| oOo READINGS IN PHILIPPINE HISTORY _ John receives a monthly salary of P21,000 or P252,000 annually. At present, P21, is deducted from his annual salary under current personal income tax (PIT) rates. With’ tax reform, John will be among the many hardworking Filipinos who will be from paying personal income tax. Tax reform will increase John’s take-home pay, hel him and his family save and giving him more financial freedom. This will be a trent ea for John! 1 b. Simplifying the Estate and Donor’s Tax _ In the current system, the tax rates can reach up to 20% of the net estate value and up to 15% on net donations. TRAIN seeks to simplify this. Estate and donor's tax will be lowered and harmonized so it does not matter if the person passed away, donated a property, or simply wants to transfer a property. This will result in loss revenues but the key here is to make the land market more efficient so that the land will go to its best use. Estate Tax Instead of having a complicated tax schedule with different rates, TRAIN reduces and restructures the estate tax to a low and single tax rate of 6% based on the net value of the estate with a standard deduction of P5 million and exemption for the first P10 million for the family home. Donor Tax TRAIN also simplifies the payment of donor's taxes to a single tax rate of 6% of net donations is imposed for gifts above P250,000 yearly regardless of relationship to the donor. c. Expanding the Value-Added Tax (VAT) The Philippines has one of the highest VAT rates but also the highest number of exemptions in the Southeast Asia region. Consequently, the Philippines collect the same amount of VAT revenues as a percentage of the economy as that of Thailand despite only imposing a 7% VAT rate, while the Philippines is at 12%. These tax exemptions have been given to many sectors and were supposedly very well meaning. However, these exemptions have also created much confusion, complexity, and discretion in our tax system resulting in leakages and opening doors for negotiation, corruption, and tax evasion. The truth is, these exemptions are not free and someone pays for them, and it is most often the poor who pays as they are deprived of quality public service necessary to | accelerate their graduation out of poverty. | TRAIN aims to clean up the VAT system to make it fairer and simpler and lower the cost of compliance for both the taxpayers and tax administrators. This is achieved by limiting ‘VAT exemptions to necessities such as raw agriculture food, education, and.__ READINGS IN PHILIPPINE HISTORY health. This does not mean that the benefits the poor rightly deserve will be removed. The Duterte administration commits to use the budget to provide targeted transfers and programs that are more transparent and accountable, The administration will direct the way to protect the poor and vulnerable compared to the tax exemptions and blind subsidies that are inefficient and largely beneficial to the rich since they have higher _ purchasing power. TRAIN repeals 54 out of 61 special laws with non-essential VAT exemptions, thereby making the system fairer. Purchases of senior citizens and persons with disabilities, however, will continue to be exempt from VAT. Housing that cost below P2 million will be exempt from VAT beginning 2021, while medicines for diabetes, high cholesterol, and hypertension will be exempt beginning 2019, : export goods out of the country. This will be implemented together with an enhanced VAT refund system that will provide timely cash refunds to expotters. The VAT threshold is increased from P1.9 million to P3 million to protect the poor and low-income Filipinos and small and micro businesses and for manageable administration. This effectively exempts the sale of goods and services of marginal ‘establishments from VAT. Under TRAIN, VAT exempt taxpayers will have the following ‘options: * PIT schedule with 40% OSD on gross receipts or gross sales plus 3% percentage tax * PiT schedule with itemized deductions plus 3% percentage tax, or © Flat tax of 8% on gross:sales or gross revenues in lieu of percentage tax and i‘ personal income tax. | | The reform also aims to limit the VAT zero-rating to direct exporters who actually F f j d. Increasing the Fuel Excise Tax TRAIN increases the excise of petroleum products, which has not been adjusted since 1997. The non-indexation of fuel excise tax to inflation has eroded the revenues collected by P140 billion per year in 2016 prices. Fuel excise is wrongly perceived to be anti-poor. Based on the Family Income and Expenditure Survey (FIES) 2015, the top 10% richest households consume 51°% of total fuel consumption. The top 1% richest households consume 13%, which is equivalent to the aggregate consumption of the bottom 50% of households. Clearly, this is a tax that will affect the rich far more than the poor, given their greater oil consumption than the poor. The Duterte administration is also doing this to address environmental and health _ concerns. By taxing dirty fuel correctly, we are also investing in a more sustainable future > for our country. One consequence of exempting diesel from excise is the shift from gasoline to © diesel automobiles. For instance, prior to exempting diesel in 2005, there was slightly more » gasoline sport utility vehicles than diesel SUVs. Over time, with cheaper diesel prices, consumers shifted to diesel SUVs. As of 2013, some 72% of newly registered SUVs are diesel powered compared to 28% of gasoline. This is basically giving tax breaks to rich people who can afford to buy SUVs.| | ; ! Expanding the VAT base and adjusting excise taxes would raise prices of some j commodities faced by consumers, but this will be minimal or moderate and only | temporary. DOF estimates around 0.73 percentage point increase in inflation during the first year of implementation with the impact tapering off over time. Food prices increase by up to 0.73 percentage point, transportation up to 2.8 percentage point, and electricity up to 0.7 percentage point. In 2016, despite a P14 increase in diesel oil prices from P18.25 to P32.10, inflation still remained low and stable, Prices of food, transportation, electricity, gas, housing, and water increased only by 2% to 3%. Basic commodities did not increase in prices despite the 75% increase in diesel price. Unlike in the 1970s and 1980s, our economy today is much stronger, diversified, and resilient. READINGS IN PHILIPPINE HISTORY In the recent past, the Philippines had two major economic shocks—one is the VAT reform of 2005 and the other is the global oil price hike in 2011. Both events significantly raised fuel prices. Despite concerns then that higher taxes or higher prices would lead to devastating economic growth arid skyrocketing inflation, history shows that the ec has weathered quite well even when the economy then was not in the best of shape. In the aftermath of the VAT reform in 2005, GDP growth slowed as consumption, slowed down and inflation temporarily increased, but the economy did not collapse and inflation was manageable. On the contrary, the VAT reform significantly improved the » fiscal position of the government and buoyed the economy, and partly credited for the stronger and more resilient economy we enjoy today. q The global oil price shock in 2011 is similar. Though oil prices increased from $61 per barrel to up to $130 per barrel at its peak, inflation was managed well by the central bank and kept at below 5%, and the economy continued to grow. Today, with a smaller increase in fuel cost due to the excise reform, the administration is certain that the economy can, like before, manage growth and inflation well and even do better. . e. Increasing the Excise Tax of Automobiles TRAIN simplifies the excise tax on automobiles, but lower-priced cars continue to. be taxed at lower rates while more expensive cars are taxed at higher rates. This excise will raise revenue in a very progressive manner as the richer buyers tend to own more and expensive cars compared to those who earn less. ‘Up to 600,000 2% 2% P600.00 and below Over 600,000 600,000,to t0 11 milion = 1,000,000 - Over 11 millon 1120004 40%in | sey, 1,000,000 to oj to 21 milion excess of 11 millon 4,000,000 Over 21 milion | 512000 s60%'n | 22% | 4.000.000 and above 30% excess of 21 millionkK oe /_—-_— Ons — —___— F ; When we consider the TRAIN as a package, the increase in take home pay from the personal income tax reduction will be more than enough to offset the increase in prices resulting from adjustments in excise taxes. For example, those who will purchase a Vios will be able to save P16,122 despite the increases in taxes, and those who buy an Innova will save around P29,923 even if they buy a car with the new rates. For a Vios, this translates to only an additional P183 in monthly amortization assuming a standard loan term of five years. This implies that for a typical buyer, the additional take home pay from the PIT reform will more than fully offset the increase in amortization. f. Increasing the Tax of Sugar-Sweetened Beverages The SSB excise tax will help promote a healthier Philippines. Along with the Department of Health (DOH), DOF supports this as part of a comprehensive health measure aimed to curb the consumption of SSBs and address the worsening number of diabetes and obesity cases in the country, while raising revenue for complementary health programs that address these problems. This is a measure that is meant to encourage consumption of healthier products, to raise public awareness of the harms of SSBs, and to help incentivize the industry to develop healthier products and complements. Why impose a tax on SSBs? © Most of the sugar-sweetened beverage, with some notable exceptions provide unnecessary or empty calories with little or no nutrition. SSBs are not a substitute for healthy foods such as fruits and rice. © SSBs are relatively affordable especially to children and the poor who are the most vulnerable to its negative effects on health. . ° SSB products are easily accessible and can be found in almost any store, unlike - other sweetened products. Most often, the poor and the children are not aware of their consequences. Common examples of SSB products include carbonated beverages, sports and energy drinks, and sweetened juice drinks. Under TRAIN, an excise rate of P6 per liter will be taxed on drinks containing caloric or non-caloric sweetener, and P12 per liter on drinks containing high-fructose com syrup. 3-in-1 coffee and milk are exempt from this tax. ‘Sweetened juice drinks Sweetened tea ¢ Other beverages: Al caroonated beverages wih suse Incuting those wi calone and fo-calonc < swaotene, Flavored water , | Energy ares Gio f° Sports crnks a 4 © omer powdered annks not classed a rile 1 Cereal and other grin beverages Other non-aleonole beverages that contain ‘edged sugarFy a Consumption of SSBs, mostly softdrinks, is significantly linked to high incidences’, of overweight, obesity, and diabetes worldwide, including in low and middle-income countries. The National Nutrition Survey (2003-2015) indicates an increasing trend of overweight or obese Filipinos through the years and across age groups, especially among the poor. In addition, habitual consumption of SSB is associated with greater incidence of Type 2 diabetes.2 According to the International Diabetes Foundation, there are around 35 million cases of diabetes in the Philippines. In 2015, government reimbursements on hemodialysis totaled to about P74 billion covering 1.1 million patients. This is considerably high spending for PhilHealth especially on benefit payout for diseases that’ are preventable with evidence-based. and recommended public policy interventions. In total, around P300 billion is spent annually by diabetic patients on maintenance medicine and operations. The government needs sufficient revenues to fund diabetes treatment as inaction will worsen these problems. The SSB excise tax, as a health measure, will encourage individuals and families to make healthy choices to ensure a healthier and more productive population. To complement the SSB excise tax, there are also non-tax measures organized around the - Health in All Policies approach. This strategy is envisioned to include regulatory measures on marketing, mandatory labeling, information and advocacy measures for health promotion, and improved nutrition literacy among Filipinos. (Department of Finance, Republic of the Philippines, n.d.) 5 References: 1 Basu, S., Yoffe, P., Hills, N., and RH. Lustig (2013). The relationship of sugar to population-level diabetes prevalence: An econometric analysis of repeated cross-sectional data. PLOS ONE 8(2): 57873 https://doi.org/10.1371/journal.pone.0057873 * 2Imamura, F., O'Connor, L., Ye, Z., Mursu, 1, Hayashino, Y,,Bhupathiraju, S., and N. Forouhi (2015). Consumption of sugar sweetened beverages, artificially sweetened beverages, and fruit juice and incidence of type 2 diabetes: systematic review, meta-analysis, and estimation of population attributable fraction. BMJ 2015; 351:h3576. j