A comprehensive look at the Philippines' recent changes to tax legislation applicable to businesses and individuals

The Philippines continues to be one of the most attractive investment destinations in Asia. This is unsurprising given its high literacy rate; English proficiency; abundant natural resources; and efficient, productive and competitive workforce.

The first three years of the administration of President Rodrigo Duterte brought rapid changes in the business climate, tax regulatory framework and economic agenda of the Philippines. The administration recognises the importance of attracting and promoting foreign investment in the country, and is successfully addressing the goal of sustaining and improving the welfare of its citizens.

Development Agenda

Developed by the National Economic and Development Authority, long-term economic policies are enshrined in AmBisyon Natin 2040, a three-pillar development agenda emphasising socio-economic stability, security and good governance. The plan was adopted pursuant to Executive Order No. 5 of 2016 and signed on October 11 of that year. The three pillars, referred to as malasakit (compassion), pagbabago (change) and patuloy na pag-unlad (continuous growth), aim to enhance solidarity and strengthen the social fabric of the nation, reduce inequality and increase the growth potential of the economy.

AmBisyon Natin 2040 served as a foundation for the recent passage of major laws. The Tax Reform for Acceleration and Inclusion (TRAIN) bill is expected to augment public coffers by reforming tax laws and tax amnesty legislation, while the Republic Act No. 11032 of 2018 aims to fast-track measures to cut red tape and make the process of setting up and maintaining a business easier and more efficient.

As the Philippines transitions towards a more economy-driven nation, the goals set out in the AmBisyon Natin 2040 are becoming more attainable, especially with the latest advancements made in major taxation, economic and social legislation.

The First Year of Train Reforms

After the implementation of the first phase of TRAIN reforms in January 2018, both successes and hiccups were logged over the course of the year. The TRAIN bill was developed to increase government earnings, which would then fund higher public expenditure on “better infrastructure, health, education, jobs, and social protection” as stated in the law’s Declaration of Policy. More importantly, the TRAIN law seeks to improve the country’s system of taxation through the provision of a simpler and more efficient management and collection system.

Progressive tax rates were likewise targeted to encourage economic progress and solve the inequities of the previous system. The reduction of personal income tax rates for the majority of taxpaying individuals is anticipated to lead to an improvement in household resources by increasing levels of disposable income for most Filipinos and their families.

A simplified income tax system was also developed for small businesses, introducing the possibility of being taxed at a flat rate of 8% of their gross sales or receipts, provided that these do not exceed an annual threshold of P3m ($55,800).

Simultaneously, the TRAIN law raised the excise taxes on petroleum products; motor vehicles, with the exception of electric vehicles and pickup trucks; and sweetened beverages. A new tax on plastic surgery for non-medical reasons was also introduced.

However, for most of 2018 inflation surged to high levels, with rates peaking over 6.5%, significantly higher than the original government target range of 3% plus-or-minus 1% for the year. Although the causes for high prices included a range of external factors, such as increases in global oil prices, the rise in inflation was partly due to increased taxes brought about by the TRAIN law. For some time, there was a backlash against the legislation, with a number of calls to revoke some of its provisions.

Other notable changes in the TRAIN law included the adoption of a simplified system for estate and donor’s tax, which is now pegged at single rate of 6%. Business taxes are likewise reformed, with the major change reflected in the annual threshold of P3m ($55,800) for the application of value-added tax.

Tax Reform Package 2

The Tax Reform for Attracting Better and High-Quality Opportunities (TRABAHO) bill is the second component of the tax reform package spearheaded by the Department of Finance (DoF). The objectives of the bill are to make corporate tax rates in the Philippines competitive with those of its regional neighbours and to enhance the fiscal incentives regime.

At 30%, the Philippine corporate income tax is one of the highest in the region. The TRABAHO bill seeks to reduce the corporate rate by 2% every two years from January 1, 2019 to January 1, 2029, by which date the rate will be 20%. While regional operating headquarters (ROHQs) of multinational companies are currently required to pay 10% of taxable income, the TRABAHO bill proposes subjecting ROHQs to a regular corporate income tax after two years of the law coming into effect.

Fiscal Incentive System

The TRABAHO bill includes a proposal to reform the fiscal incentives system, with a focus on creating a structure that is time-bound, transparent, targeted and performance-based, guided by the Strategic Investment Priority Plan (SIPP).

The TRABAHO bill proposes that the income tax holiday incentive be granted for a period not exceeding three years, provided that after the expiration of the incentive the registered enterprise be taxed at a preferential rate of 18%. The enterprise will also qualify for other special deductions for a period of up to two years. The 18% tax rate will be reduced by 1% every two years until 2029, dropping from 17% in 2021 to 13% by 2029. Other incentives which may be granted include:

• A depreciation allowance on assets of 10% for buildings, and 20% for machinery and equipment;

• A maximum rate of 50% on additional deductions on labour expenses;

• A maximum of 100% on additional deductions of costs incurred for research and development, training and infrastructure development;

• A deduction for reinvestment allowances to manufacturing industries;

• The carry-over of enhanced net operating loss; and

• An additional maximum deduction of 50% on increments of the domestic input expense used in the registered export activity. Registered enterprises may take advantage of a maximum five-year exemption from Customs duties on the import of capital equipment and raw materials that are directly and exclusively used in registered activities. Expansion of registered activities may be granted duty exemptions on capital equipment only, provided that the activity is covered by the SIPP or is deemed an innovative project. The Customs duty will only apply on the incremental portion of the activity.

As of August 2019 the TRABAHO bill had yet to be passed into law. The DoF is keen to convince Congress to pass this package in 2019.

Green Jobs Act

Implemented by the Bureau of Internal Revenue (BIR), Regulation No. 5 of 2019 imposes the tax incentive provisions of the Philippine Green Jobs Act of 2016. The term “green jobs” refers to employment that contributes to preserving or restoring the quality of the environment. These include jobs that meet the following requirements:

• Help to protect ecosystems and biodiversity;

• Reduce energy, materials and water consumption through improving efficiency;

• De-carbonise the economy; and

• Minimise, or altogether avoid, the generation of all forms of waste and pollution. Qualified business enterprises duly certified by the secretary of the Climate Change Commission shall be entitled to a special deduction from taxable income, equivalent to 50% of total expenses for skills training and research development.

Tax Amnesty Act

Tax amnesties generally provide a climate where less-than-compliant taxpayers can begin a clean slate in terms of their tax status via the BIR. With this in mind, the Senate approved the Republic Act No. 11213, otherwise known as the Tax Amnesty Act in November 2018. President Duterte signed the act into law on February 14, 2019. With taxpayers benefitting from two types of tax amnesties under this law, the BIR will be able to collect a substantial amount of taxes, expected to amount to P27.5bn ($511.5m).

Included in the bill are the estate tax amnesty and the tax amnesty on delinquencies. The estate tax amnesty imposes on the estate of individuals who died on or before December 31, 2017, with or without assessments, and whose estate taxes have remained unpaid or accrued as of December 31, 2017, to pay an estate amnesty tax at the rate of 6% based on the deceased’s total net estate at the time of death.

To apply, the heirs and/or administrators of the deceased should file an estate tax amnesty return within two years of the effective date of the implementing rules and regulations for Estate Tax Amnesty – or until June 15, 2021. The minimum amnesty tax is P5000 ($93).

TAD

The Tax Amnesty of Delinquencies (TAD) covers certain tax cases for the taxable year 2017 and preceding years. The TAD may be applied in the following instances:

• Delinquencies and assessments that have become final and executory, on which the rate shall be 40% of the basic tax assessed;

• Tax cases subject to final and executory judgment by the courts, on which the rate shall be 50% of the basic tax assessed;

• Pending criminal cases with criminal information filed with the Department of Justice or the courts for tax evasion and other criminal offenses under the tax code, on which the rate shall be 60% of the basic tax assessed; and

• Withholding agents who withheld taxes but failed to remit the same to the BIR, on which the rate shall be 100% of the basic tax assessed. Any person or entity who wishes to take advantage of the TAD should file with the BIR a sworn TAD return accompanied by a certification of delinquency within one year of the effective date of the Revenue Regulations No. 4 of 2019 implementing the TAD or on April 24, 2019.

BIR Digital Services

The BIR has made the process more convenient for taxpayers by providing more opportunities to utilise e-services and by employing digitalisation strategies to enable taxpayers to engage with regulatory and compliance requirements. The BIR’s technology-led initiatives are aimed at providing more transparency and accountability of BIR personnel within a digitally governed environment. Such services also better allow the BIR to track down and collect the appropriate taxes from non-complying taxpayers, while providing preferred service treatment to the consistent taxpayers at the same time. The following are among the e-services offered by the BIR to taxpayers:

• Electronic registration (eReg): eReg is an online application used for an array of taxpayer registration services, such as the issuance of taxpayer identification numbers, registration payment fees and generating certificates of registration.

• Electronic Filing and Payment System (eFPS): The eFPS is an application used in the processing and transmission of tax return information, attachments and tax payment procedures, allowing taxpayers to pay their taxes online.

• Electronic BIR Forms (eBIRForms): eBIRForms provide a convenient way for taxpayers to fill out tax forms offline. Taking advantage of automatic computation, validation and other digital features, returns are less susceptible to human error. Submission of the forms, however, requires the use of the online version.

• Electronic Payment (ePay): The ePay system enables taxpayers to access online payment channels of authorised agent banks and other payment media for the settlement of tax liabilities.

• Electronic Submission (eSubmission): eSubmission enables taxpayers to submit their documents as attachments, to the BIR. These include quarterly alphalists of payees; summary alphalists of withholding tax; and summary lists of sales, purchases and imports.

• Electronic Accreditation and Registration System (eAccReg): The eAccReg system was developed for the processing of accreditation and registration applications, and is intended to speed up the procedures and processing of requirements for the issuance of permits to use in business.

• Electronic Invoicing (e-Invoicing): The e-Invoicing system allows for digital invoices. For sales of merchandise or services rendered that are valued at P100 ($1.86) or more, the Tax Code requires that all persons subject to an internal revenue tax issue duly registered receipts or sales/commercial invoices indicating the date of transaction, quantity, unit cost and description of merchandise sold or service rendered. Within five years of the TRAIN law coming into effect, or on January 1, 2023, and upon the establishment of a system capable of storing and processing the required data, BIR laws shall require that taxpayers involved in the export of goods and services, taxpayers engaged in e-commerce and/or taxpayers under the jurisdiction of the large taxpayers service to issue electronic receipts or sales/commercial invoices.

• Electronic Sales (eSales): Taxpayers engaged in businesses using cash register machines, pointof-sale (PoS) machines and other sales devices may report their gross monthly sales through the eSales system. The TRAIN law mandates an electronic sales reporting system, which provides that specified taxpayers shall be required to report their sales data to the BIR through the use of electronic PoS systems within five years of the effective date of the TRAIN law. Upon approval in Congress, the TRABAHO bill will provide for incentives to support eSales reporting systems.

Such incentives include but are not limited to a tax credit of 0.1% of the purchase value through designated electronic channels, and an additional deductible expense of 10% of the electronically traceable payments made by the taxpayer.

Ease of Doing Business Act

Republic Act No. 11032 of 2018, otherwise known as the Ease of Doing Business and Efficient Government Service Delivery Act (EODBA) of 2018, was signed into law on May 28, 2018.

The EODBA provides for an adoption of simplified requirements and procedures that will reduce bureaucratic requirements and expedite both business- and non-business-related transactions with the government. The law also provides for a “zero-contact policy” wherein government officers are prohibited from having any contact of any type with any transacting applicant except in the following cases:

• During preliminary assessment of the request;

• While evaluating the sufficiency of submitted requirements; or

• When it is strictly necessary, concerning an application or request. As such, the Department of Information and Communications Technology is mandated to complete a web-based, software-enabled business registration system through which all transactions are to be carried out.

The processing by all government offices of applications or requests has been pegged to a maximum period of three working days for simple transactions and seven working days in the case of complex transactions. To combat bureaucratic red tape, the number of signatories in any document has been limited to three persons.

Another provision of the law includes the development of electronic versions of licences, clearances, permits, certifications and authorisations. Digital copies of documents will have the same authority as signed hard copies. Applicants will be able to print in the convenience of their offices.

The EODBA mandates the automatic approval of licences, permits and authorisations when a government office fails to act on an application within the prescribed processing time of three to seven days, under the condition that all the required documents have been submitted and all required fees and charges have been paid to the appropriate office.

New applications for business permits and renewals shall use a single or unified business application form, which consolidates all the information of the applicant or requesting party by various local government departments. The Business One-Stop Shop, otherwise known as BOSS, has been established as a single facilitation office to receive and expedite the processing of applications for licences, clearances, permits, certifications and authorisations.

The Philippine Business Data Bank, which allows government agencies to verify the existence of a business entity using a single-reference document, shall be established by the year 2020 to provide government offices with access to the data and information of registered business entities for verification purposes. With the EODBA in place, the government regulator and transacting stakeholders will have access to faster and easier transactions, more online filing and submission of requirements and payments, and better transparency and accountability of government services.

The BIR’s Single Window Unit

Concomitant to the EODBA is the implementation of Revenue Memorandum Order No. 6 of 2018, which provides for a single-window policy at revenue district offices (RDO). With a client support section in each RDO throughout the country, a single counter shall be tasked with receiving and releasing documentary requirements and permits. The submission of invoices, receipts and other supplementary commercial documents by taxpayers for BIR stamping is no longer required. Instead a more expeditious process has been put into place: the person printing of the relevant documents is now responsible for completing the registration requirements upon submission to the BIR of the certificate of delivery.