The Philippines has been known to be one of the countries that
have the highest taxes in the Southeast Asian Region. Recently, the
government has been aggressively reforming the taxation system in
the country especially after the successful passage of the Tax
Reform for Acceleration and Inclusion (TRAIN).
The proposed second package for the TRAIN 2 program will have
impactful effects on businesses. In sum, the bill proposes to
implement fixed rates when it comes to corporate taxation and time
limits on some important business incentives.
Here is the breakdown of
important TRAIN 2 stipulations that may affect your
The bill seeks to empower more
corporations to do business in the country. This is why corporate
income tax will be lessened to 25% from the previous 30%.
Starting in January 2019, it will be reduced by 1% annually for
domestic corporations, resident foreign corporations and
non-resident foreign corporations. However, the bill also ensures
that corporate income taxes will not be lower than 20%.
Further, optional tax rate of 15% of
the corporation's gross income was deleted.
The final withholding tax of 15% is
retained and the required allowed credit against the tax due from
the taxes deemed to have been paid in the Philippines was reduced
from 20% to 15%, or the difference between the regular corporate
income tax rate and 15% tax on dividence beginning 01 January
Major changes in capital gains will
also be recorded as its increase will offer businesses some serious
pros and cons. All shares of stocks not traded in the stock
exchange will be taxed at a fixed rate of 15%.
- Changes in Tax Exemptions
The previously granted income tax
exemptions for local water districts were removed. This imposition
will will most likely push their prices up in the country.
In addition, income tax exemption of
regional or area headquarters (RHQ) was also removed.
- Optional Standard Deductions
The OSD will be lowered from 40% to
20% of the gross income of individuals and corporations. However,
non-resident aliens (for individual) and non-resident foreign
corporations the the OSD at the rate of 40%.
The option to apply for a Tax Credit
Certificate (TCC) on the refund of input VAT is removed for those
attributable to zero-rated sales or transaction. This is a big
impact to businesses especially the Philippine Economic Zone
Authority (PEZA) accredited entities who listed the refund as a
Preferential income tax rate of 10%
of proprietary educational institutions and hospitals are
The preferential income tax rate of
15% enjoyed by financial and offshore banking units (OBU) and
regional operating headquarters (ROHQ) in the country are likewise
- Changes in Special Income Tax Rates
Special income tax rates given to
non-resident cinema film owners, lessors or distributors, owners or
lessors of vessels chartered by Philippine nationals, and
owner or lessor of aircraft, machineries and other equipment will
no longer apply.
Interest income of a resident
foreign corporation from a depository bank under the expanded
foreign currency deposit system is now increased from 7.5% to 15%
final income tax rate.
Telecommunication corporations are
now included in the scope of the 3% franchise tax. Further,
telecommunication, radio and/or television broadcasting
corporations are now required to be VAT-registered.
On the other hand, the Php10 Million
gross receipts threshold for franchise tax is removed.
- Determination of gain or loss on exchange of properties
The tax-free exchange application
(Section 40(C)(2) of the Tax Code was expanded to cover exchange of
properties between parties pursuant to a reorganization.
Real score behind TRAIN 2 Incentive Reform
According to the
BusinessWorld report, there are four (4) House bills pushing
for these incentives reform. Eventually, the committee agreed to
consolidate it under the Tax Reform for Attracting Better and
High-quality Opportunities (TRABAHO) bill.
The bill pushes for the reorganization of the Financial
Incentives Review Board (FIRB) and will be deemed as the "principal
authority" handling the issuance of incentives. Other incentive
issuances of implementing arms such as PEZA and the Board of
Investments (BoI) are still subject to the approval of the
Aside from the involvement of the Department of Finance
Secretary, who is now acting as the co-chair of the FIRB, certain
incentives will no longer be up for indefinite renewals. Most of
the business incentives will become timebound such as the income
tax holidays and 15% preferential income tax. The average time
period to avail the incentive is around 4 to 5 years but on the
other versions of the bill, it can go up to 15 years.
Some incentives are also added that will be beneficial to select
industries such as manufacturing and mining. In the proposed
packages, the manufacturing sector can receive reinvestment
allowances and duly exemption on raw materials.
According to Bloomberg,
the final version of TRAIN 2 is expected to be enacted by 2019.
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