Department of Finance’s proposal on tax reforms - Part 1

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.

What is  TRAIN (Tax Reform for Acceleration and Inclusion)?

The goal of the first package of the Comprehensive Tax Reform Program (CRTP) 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 goverment's programs and services.

1. Lowering the Personal Income Tax

TRAIN will lower personal income tax (PIT) for all taxpayers except the richest. Under the proposed tax system, those with taxable income below P250,000 will be exempt from paying PIT, while the rest of taxpayers, except the richest, will see lower tax rates ranging from 15% to 25% by 2020. To maintain progressivity, the top individual tax payers—those whose annual taxable income exceeds P5 million—will face a higher tax rate, from the current 32% to 35%.

Example computation. Infographic: Department of Finance

2. Simplifying Estate and Donor's Tax

Estate Tax - Instead of having a complicated tax schedule with different rates, TRAIN proposes to reduce and restructure the estate tax to a low and single tax rate of 6 percent based on the net value of the estate with a standard deduction of P5 million.

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.

Donor Tax - Similarly, the reform also applies to payment of donor’s taxes wherein a single tax rate of 6% of net donations will be imposed for gifts above P100,000 yearly regardless of relationship to the donor.

3. Expanding the Value Added Tax

Infographics: Department of Tourism

The Philippines has one of the highest VAT rates but also the highest number of exemptions in the Southeast Asia region. The Philippines has 59 lines of exemptions in the tax code, so much more than Indonesia with 37, Thailand with 35, Vietnam with 25, and Malaysia with only 14. In addition to these 59 lines of exemptions, there are 84 additional exemptions provided under special laws passed since 1988. Consequently, the Philippines collect the same amount of VAT revenues as a percentage of the economy as that of Thailand despite Thailand 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. 

Senior citizens and persons-with-disabilities will still enjoy exemptions. Once TRAIN is fully implemented and the VAT system cleaned up, only then is it conceivable to lower the VAT rate. The government proposes to increase the VAT threshold 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. VAT exempt taxpayers will have the following options:

• Proposed PIT schedule with 20% OSD on gross receipts or gross sales plus 3% percentage tax
• Proposed 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 personal income tax.

4. Increasing the Excise Tax of Petroleum Products

TRAIN proposes to increase the excise of petroleum products, which has not been adjusted since 1997. An excise tax is an indirect tax on selected goods that have negative externalities and are non-essentials. This is a measure used to discourage too much consumption of scarce resources and limit the bad effects of some products, such as pollution and congestion. It is a progressive form of taxation since those who consume more will pay more. Currently, diesel is exempted from excise taxes while gasoline is taxed at P4.35 per liter. The non-indexation of fuel excise tax to inflation has eroded the revenues collected by P140 billion per year in 2016 prices.

The government proposes to stagger the increase in the excise following stakeholder consultations to P3 immediately after implementation, P2 the year after, and P1 in the third year. The total of P6 increase accounts for the eroded amount stemming from 20 years of non-adjustment.

Afterwards, under the DOF proposal, the excise shall be increased annually based on the inflation rate. In the event that Dubai crude oil exceeds $100 per barrel, the increase in the excise will be temporarily frozen so as to not unduly affect the public.

Infographics: Department of Finance

The fuel excise is wrongly perceived to be anti-poor. Based on the Family Income and Expenditure Survey (FIES) 2015, however, 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 due to 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 sport utility vehicles (SUVs). As of 2013, some 72% of newly registered SUVs are diesel powered compared to 28% of gasoline, and this is basically giving tax breaks to rich people who can afford to buy SUVs.

Oil Consumption. Infographics by Department of Finance

Expanding the VAT base and adjusting excise taxes would consequently raise prices of some commodities faced by consumers, but this will be minimal or moderate and only temporary. DOF estimates around 0.9 percentage point increase in inflation during the first year of implementation with the impact tapering off over time. Food prices may increase by up to 0.9 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.

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. 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.

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. In fact, the economy remained resilient and grew rapidly in the last 10 years.

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.

Both events significantly raised fuel prices. Despite concerns then that higher taxes or higher prices would lead to devastating economic growth and skyrocketing inflation, history shows that the economy has weathered quite well even when the economy then was not in the best of shape.
Today, with a smaller increase in fuel cost due to the excise reform (around 10%), the administration is certain that the economy can, like before, manage growth and inflation well and even do better.

5. Increasing the Excise Tax of Vehicles

TRAIN will also adjust the excise tax on automobiles, but lower-priced cars will continue to be taxed at lower rates while more expensive cars will be 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. This excise system will make SUV and luxury car owners contribute more.

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.

6. Introducing an Excise Tax for Sugar-Sweetened Beverages

The SSB excise tax is proposed to promote a healthier Philippines. Along with the Department of Health (DOH), DOF supports this proposal 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. The revenues to be raised from the SSB excise tax will be used solely for education and health to promote the welfare of the people.

The main rationale for taxing SSBs is the following:

• 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. TRAIN proposes to tax these products an excise rate of between P5 to P10 per liter depending on the ingredients and amount of sweetener used. The rate will be adjusted based on cumulative inflation.

Consumption of SSBs, mostly softdrinks, is significantly linked to high incidences of overweight, obesity, and diabetes higher worldwide, including in low-and middle-income countries.1 In the Philippines, according to the National Nutrition Survey (2003-2015) there is 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. According to the International Diabetes Foundation, there are around 3.5 million cases of diabetes in the Philippines. In 2015, the government reimbursements on hemodialysis totaled to about P7.4 billion to cover 1.1 million patients. This is considerable 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 and 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.