What is the effect of TRAIN Law on your income and take-home pay this 2023? Learn more about your taxes and how to compute them.
Tax Reform for Acceleration and Inclusion (TRAIN) Law
The Tax Reform for Acceleration and Inclusion (TRAIN) Law, officially known as Republic Act (RA) 10963, is a significant legislative reform that overhauled the taxation system in the Philippines. Enacted in 2017, it introduced a series of changes aimed at streamlining the country’s tax structure. The TRAIN Law primarily focused on the following key areas:
- Personal Income Tax: The law aims to reduce personal income tax rates for most taxpayers. As a result, it puts more money in the pockets of Filipino workers.
- Estate Tax: Estate tax provisions aims to make it more equitable and less burdensome for heirs.
- Donor’s Tax: The TRAIN Law introduced changes to the donor’s tax, impacting transactions involving the transfer of property and assets.
- Value-Added Tax (VAT): Changes in VAT regulations aimed to make the system simpler and fairer, with certain exemptions and thresholds.
- Documentary Stamp Tax: The law modified the documentary stamp tax, affecting various legal documents and transactions.
- Excise Taxes: The TRAIN Law increased excise taxes on specific products. This includes automobiles, petroleum products, sweetened beverages, cigarettes, and mineral products. These increases intend to generate additional revenue for the government.
Additionally, the TRAIN Law brought about improvements in the administration of taxes to enhance efficiency and compliance.
Ultimately, the primary objectives of the TRAIN Law were to simplify the tax system and reduce personal income tax rates. Moreover, it aims to generate revenue by increasing taxes on selected products and services. This approach aimed to create a more equitable tax structure and address economic challenges, including poverty reduction.
Income tax is a crucial component of a country’s taxation system. Additionally, it plays a pivotal role in generating revenue for the government. Put simply, it is a tax on an individual’s total earnings over the course of a year. In the Philippines, as in many other countries, income tax is on individuals based on their income tax level or bracket.
Key Points about Income Tax in the Philippines:
- Taxable Income: Individuals earning more than Php 250,000 per year in the Philippines must pay income tax. This includes those who work for employers, are self-employed or earn income through other means.
- Withholding Tax: For employees, income tax is an automatic deduction from their salaries on a monthly basis. In the payslip, this appears as withholding tax. This system ensures that individuals fulfill their tax obligations gradually throughout the year.
- Exemption for Low Earners: The law does not require individuals earning below Php 250,000 to file an Income Tax Return (ITR). This exemption aims to ease the tax burden on lower-income individuals.
- Calculating Withholding Taxes
- Tax Rates for Contractual Employees
- Tax annualization in the Philippines
Pre-TRAIN law vs. TRAIN Law Income Tax Rates
The Tax Reform for Acceleration and Inclusion (TRAIN) Law, signed in December 2017 and effective from January 1, 2018, brought significant changes to the Philippines’ Personal Income Tax (PIT) rates. These changes had a substantial impact on various categories of earners in the country.
Old vs. New Income Tax Rates
Before the implementation of the TRAIN Law, the income tax rates were the same for Compensation Income Earners, Mixed Income Earners, and Self-Employed and Professionals. However, the TRAIN Law introduced a separation of income tax schedules for these three categories. Let’s delve into these changes:
- Compensation Income Earners: Under the previous system, Compensation Income Earners faced a specific set of tax rates. The TRAIN Law introduced new tax brackets and significantly lowered the rates. As a result, this reduced income tax liabilities for many employees.
- Mixed Income Earners: Individuals with mixed sources of income, such as both employment and business income, also experienced changes in their tax obligations. The TRAIN Law brought about adjustments to the tax schedules for this group, affecting how they calculate their income tax.
- Self-Employed and Professionals: Self-employed individuals and professionals saw modifications to their income tax rates as well. These changes aimed to align the tax system with the goal of making taxation fairer and more progressive.
Old Income Tax Schedule
Before the implementation of the TRAIN Law, the Philippines implemented the following tax schedule:
Old Income Tax Schedule:
- Earnings up to Php 10,000: Individuals earning Php 10,000 or less had an income tax rate of 5%.
- Earnings between Php 10,000 and Php 30,000: Php 500 plus 10% of the excess over Php 10,000.
- Earnings between Php 30,000 and Php 70,000: Php 2,500 plus an additional 15% of the amount exceeding Php 30,000.
- Earnings between Php 70,000 and Php 140,000: Php 8,500 plus 20% of the excess over Php 70,000.
- Earnings between Php 140,000 and Php 250,000: Php 22,500 plus 25% of the amount exceeding Php 140,000.
- Earnings between Php 250,000 and Php 500,000: Php 50,000 plus 30% of the excess over Php 250,000.
- Earnings over Php 500,000: Php 125,000 plus 32% of the amount exceeding Php 500,000.
Compensation income earners: New tax rates and tax schedule
Effective January 1, 2023, the TRAIN Law brought about a new income tax schedule for compensation income earners, simplifying the tax system and providing relief for lower-income individuals. Here are the key provisions of the new tax schedule:
- Income up to Php 250,000: Compensation income earners with an annual income of Php 250,000 or below are exempted from paying income tax. This means that no withholding tax will be collected from them.
- Income over Php 250,000 but not exceeding Php 400,000: 15% of the excess over Php 250,000
- Income over Php 400,000 but less than Php 800,000: Php 22,500 with an additional amount equal to 20% of the excess over Php 400,000
- Income over Php 800,000 but not more than Php 2,000,000: Php 102,500 plus an amount equal to 25% of the excess over Php 800,000
- Income exceeding Php 2,000,000 but not exceeding Php 8,000,000: Php 402,500 plus 30% of the excess over Php 2,000,000
- Income over Php 8,000,000: Php 2,202,500 and an additional amount equivalent to 35% of the excess over Php 8,000,000
Self-employed and professionals: New tax rates and tax schedule
Under the TRAIN Law, self-employed individuals and professionals have flexibility in how they can fulfill their tax obligations. Individuals earning Php 3,000,000 or less annually can opt to follow the regular Personal Income Tax (PIT) rates, which are based on their income levels, or they can choose an alternative tax scheme.
Here are the details of these options:
- Regular PIT Rates: PIT rates are progressive and depend on the individual’s income level. This option may be suitable for those with relatively lower incomes.
- 8% of Gross Sales or Receipts: Pay the equivalent of 8% of their gross sales or receipts in excess of Php 250,000. This option is particularly attractive as it simplifies tax computation and can result in lower tax liabilities for some individuals.
Mixed-income earners: New tax rates and tax schedule
Mixed-income earners are individuals who receive both a salary from an employer and income from a business or the practice of a profession. Complying with the tax regulations for mixed-income earners involves computing income tax for both sources of income separately.
Here’s how mixed-income earners can calculate their income tax:
1. Salary Income Tax: The income tax for the salary portion of mixed-income earners should follow the tax schedule for compensation income earners. This means that the tax rates and brackets applicable to regular employees apply to determine the income tax liability on their salary income.
2. Business or Profession Income Tax: The income from a business or the practice of a profession is subject to income tax as well. For this portion of their income, mixed-income earners should use the tax schedule for self-employed individuals and professionals, as applicable. This schedule will determine the income tax liability for their business or professional income.
Challenges and Considerations:
- Mixed-income earners may need to maintain separate records and documentation for their salary income and business or professional income to accurately compute their income tax.
- It’s important to ensure compliance with both sets of tax regulations and deadlines for filing and payment.
- Consider consulting with a tax professional or accountant who can assist in computing and optimizing your income tax liability as a mixed-income earner.
Who is exempt from income tax in the Philippines?
Income tax exemptions provide relief and incentives to specific groups or entities in the Philippines. Under the TRAIN Law, here are some key exemptions:
Non-Resident Citizens of the Philippines
The law exempts non-resident citizens from income tax if they meet certain conditions:
- They have satisfactorily established to the Commissioner their bodily presence overseas and their intention to reside there.
- They are permanent employees or immigrants who leave the Philippines and live overseas during the taxable year.
- They work abroad and are required to stay the majority of the taxable year abroad.
- If they were previously non-resident citizens but have returned to the Philippines for permanent residence, they are exempt from paying income tax only during the year of arrival.
Overseas Filipino Workers (OFWs)
OFWs are exempt from income tax for income from outside the Philippines. However, any income they earn within the Philippines is taxable.
Seafarers who receive their compensation from outside the Philippines do not pay income tax. However, they become subject to income tax if they receive compensation or earn income within the Philippines.
General Professional Partnerships (GPPs)
GPPs are exempt from income tax because their income does not come from trade or business involvement.
Government-Owned and Controlled corporations (GOCCs)
Certain government-owned and controlled corporations and agencies, such as the Government Service Insurance System (GSIS), Social Security System (SSS), and Philippine Health Insurance Corporation (PhilHealth), are exempt from income taxes.
Local water districts
The National Internal Revenue Code (NIRC) of 1997 dictates that local water districts are exempt from income tax. Instead, the law mandates the redirection of these taxes toward improving water services.
Exemptions on Personal Income Tax
Here are the key exemptions on personal income tax under the TRAIN Law:
- Minimum Wage Earners (MWEs):
- MWEs and individuals whose taxable income does not exceed Php 250,000 annually are exempt from paying income tax.
- No withholding or income tax collections from MWEs and those within this income threshold.
- De Minimis Benefits:
- De minimis benefits refer to allowances or benefits of small value awarded to employees by employers, separate from their basic compensation.
- These benefits are meant for the general welfare of the employee and are exempt from income tax.
- Other Benefits Not Exceeding Php 90,000:
- Other benefits provided to employees that do not exceed the amount of Php 90,000 annually are exempt from tax.
- This ceiling amount was raised from Php 82,000 with the implementation of the Tax Reform for Acceleration and Inclusion (TRAIN) law.
Designation of Funds from TRAIN law
The TRAIN Law, or Tax Reform for Acceleration and Inclusion Law, allocates its funds to various essential sectors and programs to address specific needs and promote development. Here are the key areas where the funds from the TRAIN Law go:
The TRAIN Law allocates funds to exempt medicine for hypertension, diabetes, and high cholesterol from Value Added Tax (VAT) charges. This aims to make essential medications more affordable and accessible to the public.
Funds from the TRAIN Law are directed towards the education sector. They are used to:
- Build additional classrooms to address overcrowding and promote a better learning environment.
- Hire more teachers to improve the teacher-to-student ratio, ensuring quality education for all.
The additional funding from the TRAIN Law is channeled into the healthcare system to:
- Upgrade existing hospitals and build new healthcare facilities, including barangay health stations, rural health units, and urban health centers.
- Work towards achieving total Philhealth coverage to provide affordable healthcare services to Filipinos.
- Hire more medical staff, practitioners, and health-related personnel to enhance healthcare services.
- Funds from the TRAIN Law contribute to the government’s infrastructure development initiatives, including the Build, Build, Build program led by the Department of Public Works and Highways (DPWH).
- This program focuses on improving various aspects of infrastructure, such as roads, bridges, irrigation systems, and public facilities.
Pantawid Pasada Program (PPP)
- To mitigate the impact of excise taxes on fuels and the implementation of fare discounts, the TRAIN Law supports the Pantawid Pasada Program.
- This program provides vouchers or fuel cards to qualified franchisers of Public Utility Jeepneys (PUJs), helping them manage fuel costs and maintain affordable public transportation.
Related: Tax mapping in the Philippines