Filipino Spending Power Rises As TRAIN Law Rates Decrease

Filipino workers will receive a higher take-home pay this 2023 under the Tax Reform for Acceleration and Inclusion or the TRAIN Law. This means that middle-class Filipino consumers will have increased savings and can spend more.

If your want to know more about the updated income tax rates, continue reading this article.

What is the TRAIN LAW Philippines?

Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) law under the Comprehensive Tax Reform Program is one of the tax reforms to the National Internal Revenue Code of 1997, as amended or the Tax Code. This tax reform package introduced changes in personal income tax (PIT), estate tax, donor’s tax, value-added tax (VAT), documentary stamp tax (DST), and excise tax on sweetened beverages, tobacco products, mineral products, petroleum, automobiles, sweetened beverages, and cosmetic procedures. Thus, it is a law seeking to correct deficiencies in the Philippines’ tax system to have a simpler, more efficient, and effective tax system.

The TRAIN law corrected the inequity of the tax system by the reduction of income taxes and by giving relief to income taxpayers after 20 years of non-adjustment of the tax rates. This law also raises revenues to fund the President’s priority infrastructure programs to reduce poverty incidents from 21.6% in 2014 to 14% by 2022.

The incremental revenues of the TRAIN law will be allotted to the Philippines’ “Build, Build, Build Program,” and the balance will go to social service programs.

What is an Income Tax?

An Income Tax is a tax on a person’s income, emoluments, profits from property, the practice of profession, the action of doing business, or on the pertinent items of gross income provided in the Tax Code of 1997, as amended, less the deduction by the Tax Code or special laws.

Who are Required to File Income Tax Returns?

Individuals

• Individuals who receive pure compensation income from two or more employers, either at the same time or at different times within the taxable year.
• Individuals who receive pure compensation income, regardless of the amount, from one or multiple employers during the calendar year, where the income tax was not correctly withheld resulting in a collectible or refundable return.
• Self-employed individuals who earn income from conducting trade or business and/or practicing a profession.
• Individuals who receive mixed income, which includes compensation income and income from conducting trade or business and/or practicing a profession.
• Individuals who receive other non-business or non-professional-related income in addition to compensation income, which is not subject to a final tax.
• Individuals who receive purely compensation income from one employer, even if the income was correctly withheld, but their spouse is not entitled to substituted filing.
• People who are non-resident citizens and receive income from sources within the Philippines.
• Aliens, whether they are residents or not, who receive income from sources within the Philippines.

Non-Individuals

• All corporations, including partnerships, regardless of how they were created or organized.
• Domestic corporations that receive income from sources in and outside the Philippines.
• Foreign corporations that receive income from sources within the Philippines.
• Estates and trusts that are engaged in trade or business.

What are the salient provisions of the TRAIN Law?

The prominent features of the TRAIN Law are lower PIT and higher consumption tax. As introduced by the law, individual taxpayers with an annual income tax not exceeding Php 250,000 are exempted from income tax. The law introduced consumption taxes in the form of higher excise tax on sweetened beverages, petroleum production, invasive cosmetic procedure, and non-essentials. The TRAIN Law also repealed exemption provisions in several special laws, thereby expanding the VAT Base.

What are the New Income Tax Rates?

Those earning Php 250,000 are still exempted from paying taxes. But those earning more than Php 250,000 to over Php 8 million will pay taxes based on the new income tax rates for 2023:

• 15% of the excess of Php 250,000 for those who earn over Php 250,000 to Php 400,000
• Php 22,500 + 20% of the excess over Php 400,000 for those who earn Php 400,000 to Php 800,000
• Php 102,500 + 25% of the excess over Php 800,000 for those who earn over Php 800,000 to Php 2 million
• Php 402,500 + 30% of the excess over Php 2 million for those who earn over Php 2 million to Php 8 million
• Php 2,202,500 + 35% of the excess over Php 8 million for those who earn over Php 8 million

The TRAIN Law will lower the personal income tax (PIT) to around five percent for those who earn between Php 250,000 and Php 2 million yearly. According to Manila Bulletin’s report, Rep. Joey Salceda, the chairman of the House Committee on Ways and Means, reported that the tax cuts will provide higher disposable income for Filipino families by an estimated Php 32 billion. He added that the tax cut will result in more consumer spending and more savings.

However, the top individual taxpayers in the country, or those earning more than Php 8 million, will have a higher tax rate of 35% from the previous 32%. Despite this increase, tax experts pointed out that the government can bring in more revenues for the country’s post-pandemic recovery plan.

Proper observance of the new withholding tax rates is required and subject to strict compliance by the Bureau of Internal Revenue. Employers who used the old tax rates from the NIRC are required to return excess deductions incurred from the old rates to their employees. Otherwise, they can be prosecuted if their employees file complaints for incorrect or wrongful deductions or non-compliance with the new mandate.

What is the Effect of the New Tax Rate?

According to Salceda, the TRAIN PIT cuts will serve as a cushion for workers from the contribution hikes. For one, Philippine Health Insurance Corporation (Philhealth) will adjust its contribution rate from 4% to 4.5%. The increase serves as the agency’s primary care benefit package, which should provide free consultation, laboratory tests, medicines, and health risk screening.

Another agency that will have a contribution hike will be Social Security System (SSS). Beginning January 2023, SSS members will face a higher contribution rate of 14% from the previous 13%. This contribution will be beneficial for SSS members as they will have higher benefits. SSS President and CEO Michael Regino said that the four-stage contribution hike allows the SSS to be funded for the future needs of its members. The Social Security Act of 2018 also provides that a raise of contribution to 15% is mandated by 2050.

PhilHealth will also make contribution adjustments until 2025 pursuant to the Universal Health Care Law.

Other Tax Updates and Modernized BIR

The filing and payment of VAT returns shall be done on a quarterly basis under the TRAIN Law. Thus, the filing of the monthly Value Added Tax Returns is not required anymore starting January 2023. Rappler reports that VAT taxpayers need to file four Quarterly Value Added Tax Returns due within 25 days following the close of each taxable quarter.

Electronic invoicing is another provision the TRAIN Law will implement this year. The Bureau of Internal Revenue (BIR) established the Electronic Invoicing/Receipting System (EIS) to help taxpayers to report sales data to the BIR electronically.

The EIS will be only used by taxpayers who must issue e-receipts or e-invoices. These businesses are those involved in the exportation of goods and services, e-commerce, and those under the jurisdiction of the Large Taxypayer’s Service (LTS).

The BIR also launched the Online Registration and Update System (ORUS) last year. This system allows taxpayers to register or update personal information. ORUS can be also used to issue Tax Identification Numbers (TIN) to foreign individuals, security authority to print receipts, and register books of accounts starting in 2023.

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