How TRAIN 2 will affect businesses in the Philippines

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 business:

• Corporate Income Tax

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.

• Intercorporate Dividends

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 2019.

• Capital Gains

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 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%.

• Input VAT Refund

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 benefit.

• Preferential Tax Rates

Preferential income tax rate of 10% of proprietary educational institutions and hospitals are removed.

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 removed.

• 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.

• Franchise Taxes

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 FIRB.

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.

Need help reassessing your tax plan? Contact us at (02) 403-5519 or send your inquiry to [email protected].