TAX REFORM FOR ACCELERATION AND INCLUSION (TRAIN) ACT

(RA # 10963)

RA # 10963, The Tax Reform for Acceleration and Inclusion (TRAIN) Act was signed by President
Rodrigo R. Duterte on December 19, 2017 and it took effect January 1, 2018.
This year marks the full implementation of the TRAIN act. This landmark measure is among the
cornerstones of the President’s poverty alleviation initiative. This significant measure overhauled the country’s
20-year old tax regime and corrected a longstanding inequity of the tax system by reducing personal income
taxes, thereby giving majority of Filipino taxpayers the much-needed relief after 20 years of non-adjustment of
the tax rates and brackets in the Tax Code. With this law, the labor sector is expected to be freed from the
burden of outdated and inequitable personal income tax and on the other end, the government will be able to
raise additional funds to help support its accelerated spending on its “Build, Build, and Build” projects and
social services programs. In a bid to make the tax system more simplified, fairer, and efficient, the present
administration’s tax package provide hefty income tax cuts and adjustments and has shifted the burden off
lower income segments towards the ultra-rich members of our society. Today, the rich will have to pay bigger
taxes to the government and the poor will benefit more from the government’s programs and services.
The foregone revenue in lowering the personal income tax is offset by higher excise levies on petroleum
and automobiles, among others.
Significant changes and major amendments to the NIRC of 1997 (RA 8428) are now in place, particulary:
on (a) personal income tax rates, (b) passive income, (c) estate tax, (d) donor’s tax, (e) the VAT by expanding
the tax base as well as removing VAT exemptions, (f) adjustments on excise taxes of fuel, automobiles, coal,
(g) Documentary Stamp Tax, and (h) it has introduced new taxes on sweetened beverages and on cosmetic
procedure (non-essential services), among others.

SALIENT FEATURES:
A. TRAIN Act has 87 sections.
B. The TRAIN Act repealed Sections 35, 62, and 89 of the Tax Code.
C. It amended the following sections of the Tax Code: Sections 5-6, 24-25, 27, 31-34, 51-52, 56-58, 74,
79, 84, 86, 90-91, 97, 99-101, 106-110, 112. 114, 116, 127-129, 145, 148, 149, 151, 155, 171, 174-175,
177-183, 186, 188-197, 232, 236-237, 249, 254, 264-269, and 288.
D. It created new Sections: Sections 51-A, 148-A, 150-A, 150-B, 237-A, 264-A, 264-B, and 265-B.
E. Forty-eight (48) exemptions from VAT under special laws are now subject to VAT (Sec. 86
TRAIN Act)
Prior to the signing of the TRAIN act, President Rodrigo R. Duterte had vetoed five (5) sections therein,
particularly:
a) The reduced tax rate (15%) applicable to managerial employees, in Regional Area/Operating
Headquarters of Multi-national Corporations, Offshore Banking Units and Petroleum Service
Contractors and Subcontractors should no longer be allowed; hence, they are now taxed like an ordinary
compensation income earner and use the tax rate and schedule of 20% - 35% under the new law.
b) Sale of goods and services to enterprises registered with PEZA and to tourism enterprises operating
within the economic zones are not subject to VAT. The President said this is against the principle of
1|Page
 limiting the VAT Zero-rating to direct importers only. Hence, sales to these enterprises are now subject
to VAT.
c) The TRAIN provided percentage tax exemption to self-employed taxpayers and professions whose gross
sales/receipts do not exceed P500k/annum. The President vetoes this provision because these taxpayers
are already exempt from VAT. (Sec. 38, TRAIN act)
d) Petroleum products when used as input, feedstock or as raw materials in the manufacturing of
petrochemical products, or in the refining of petroleum products or as replacement fuel are exempt from
excise taxes. The President said this is too general which may be subject to abuse and thus lead to
massive revenue erosion. The Tax Code has already identified petroleum products exempt from excise
taxes. Thus, under the new law, these products are subject to excise tax. (Sec. 43, TRAIN Act)
e) Sec. 82 of the TRAIN Act has provided for the earmarking of incremental tobacco taxes. President
Duterte vetoed this because it has effectively amended the Sin Tax Law (RA 10351), which provided for
guaranteed funds for universal health care. The provision for the TRAIN law will effectively diminish
the share of the health sector.
On Income Tax – The new law has relatively decreased the tax on personal income.
a) The NEW income tax rates are 20%, 25%, 30%, 32%, and 35% for 2018 – 2022. Beginning 2023 and
onwards, the rates will be lowered from 20% to 15% up to 35% (removing the 32% from amongst the
income tax rates).
Beginning January 1, 2018 – December 31, 2022:
Gross Income per annum Tax payable and tax rate
More than P250k 20% in excess of P250k
More than P400k P30k + 25% in excess of P400k
More than P800k P130k + 30% in excess of P800k
More than P2M P490k + 32% in excess of P2M
More than P8M P2.41M + 35% in excess of P8M

January 1, 2023 onwards:

b) Compensation income of P250k and below – exempt from income tax and withholding tax. They are
also exempt from the filing of an income tax return. However, resident citizen and any alien in business
or practice of profession within the PH shall file an income tax return regardless of the amount of gross
income.
 Holiday pay, hazard pay, OT pay, and night differentials of minimum wage earners (MWE)
remain to be exempt from income tax.
c) The threshold exemption on 13th month pay and other bonuses received by salaried employees has been
raised to P90k from P82k. Hence, P90k and below is exempt from income tax.
 This P90k applies to both private and public employees.
2|Page
  The amount includes the 13th month pay, benefits received by officials and employees of the
national and local government pursuant to RA 6696.
 It includes benefits received by officials and employees pursuant to PD 851, as amended by MO
28, dated August 13, 1986.
 It includes other benefits such as de minimis benefits, productivity incentives, and Christmas
bonus.
 Employees’ SSS, GSIS, PHIC, Pag-Ibig contributions and union dues are not included in the
computation of his gross income.
d) If the compensation income of an employee is more than P250k per annum, the tax rates and schedule
under the TRAIN Act shall be followed.
e) Annual Gross Income of P8M and above is taxed at 35%. This is applicable to all kinds of individual
taxpayers except non-resident aliens not engaged in business and trade within the PH because they are
taxed at 25% on their gross income.
f) Gross income of P250k and below – exempt from income tax but required to submit income tax return.
g) If the gross sales, receipts, or income of self-employed or professional taxpayers is above P250k but not
more than P3M, they have the option to choose (a) payment of withholding tax of 8% FLAT RATE on
their gross sales or receipts or (b) to pay the graduated income tax rates of 20% - 35% under the TRAIN
Act.
 If (a) is chosen, the subject taxpayer is no longer required to pay Percentage Tax and Income
Tax, but only the 8% FLAT RATE on their gross sales or receipts in excess of P250k in liew of
the graduated income tax.
i. The taxable base of the flat 8% is the taxpayer’s gross sales/receipts and other non-
operating income.
ii. The taxpayer who opted to be taxed at 8% may no longer claim allowable deductions or
avail of the optional standard deduction of 40%.
 If (b) is chosen, the subject taxpayer shall follow the new tax rates and schedules of the TRAIN
Act for income tax and pay the business tax of 3% per annum Percentage Tax.
h) The taxpayer who has opted to be covered by the 8% flat income tax rate is not required to attach his
financial statements (FS) in fling the final ITR. However, existing rules and regulations on bookkeeping
and invoicing/receipting shall still apply.
i) The option to be taxed at 8% Income Tax Rate is NOT available to:
 A VAT-registered taxpayer regardless of the amount of gross sales/receipts,
 A taxpayer who is subject to other Percentage Taxes under Title V of the Tax Code, as amended,
 Partners of a GPP by virtue of their distributive share from the GPP, which is already net of cost
and expenses.
j) Who shall be covered by the graduated income tax rate under the TRAIN Act?
 A taxpayer who has selected this tax regime.
 A taxpayer who has failed to signify his chosen intention or failed to qualify to be taxed at the
flat 8% income tax rate.
k) If the flat 8% income tax rate was initially chosen but his gross sales/receipts and other non-operating
income exceeded the VAT threshold (more than P3M) during the taxable year, his income tax shall be
computed under the graduated income tax rates and he shall be allowed a tax credit of the previous
quarter’s income tax payment(s) under the 8% income tax rate option.
l) Unless the self-employed taxpayer or the professional signifies in the 1st quarter Percentage and/or
Income Tax Return, or on the initial quarter return of the taxable year after the commencement of the
new business/practice of profession of the taxable year his intention to elect the 8% income tax rate, said
3|Page
 taxpayer shall be considered as having availed of the graduated rates under the new law and such
election shall be irrevocable for the taxable year.
m) A taxpayer subject to the graduated Income Tax Rates is also subject to the applicable business taxes
under the Tax Code and he must submit Financial Statements (FS) even if the gross sales/receipts and
other non-operating income is less than the VAT threshold of more than P3M. If his gross sales/receipts
are more than the VAT threshold, the FS must be audited by a CPA.
n) If the annual gross sales or income of self-employed or professional taxpayers is more than P3M – they
DO NOT have a choice but to follow the graduated income tax rates and schedule under the TRAIN Act
on their net taxable income. They are also subject to the VAT.
o) Self-employed individuals and professionals with gross sales, receipts, or income of P3M and below has
no option to register as a VAT businessman.
 Those who have chosen to pay the flat 8% tax on gross sales/receipts shall not be allowed to
avail of the option of registering for VAT.
p) The taxpayer with less than P3M gross sales or income who chooses the graduated income tax rates
under the TRAIN may continue the use of itemized standard deductions or the optional standard
deductions of the Tax Code:
 Personal income tax schedule under the TRAIN with 40% OSD on his gross sales/receipts plus
3% percentage tax, or:
i. General Professional Partnership (GPP) and the partners comprising such partnership
may avail of the optional standard deduction (OSD) of 40% only once, either by the GPP
or the partners comprising the partnership.


4|Page