TRAIN and CREATE Laws in the Philippines

• The Tax Reform for Acceleration and Inclusion (TRAIN) Law, also known as RA 10963, aims to lower personal income tax rates, increase excise taxes, expand the value-added tax base, and promote simplicity, equity, and economic growth.
• The Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) Law, also known as RA 11534, aims to reduce corporate income tax rates, provide fiscal incentives to businesses, and improve the investment climate.
• TRAIN Law is the first package of the comprehensive tax reform program, signed on December 19, 2017, and effective January 1, 2018, revising the outdated National Internal Revenue Code (NIRC) or Tax Code adopted in 1997.
• TRAIN Law seeks to correct deficiencies in the tax system.

Tax Reforms Under TRAIN Law

• Key measures include additional powers for the Commissioner, restructuring the Personal Income Tax System, and new tax rates for sweetened beverage drinks, petroleum, automobile, tobacco, and cosmetic surgery.
• Excise taxes are imposed on the production, sale, or consumption of specific goods and services such as alcohol, tobacco, fuel, and airline tickets.

Automobile Excise Tax Rates

• Over 0 up to 600,000: 4%
• Over 600,000 up to 1,000,000: 10%
• Over 1,000,000 up to 4,000,000: 20%
• Over 4,000,000: 50%

Sweetened Beverages Excise Tax

• Using purely caloric sweetener, purely non-caloric sweetener, or a mixture of both: PHP 6/liter
• Using purely high-fructose corn syrup or in combination with any caloric or noncaloric sweetener: PHP 12/liter
• Using purely coconut sap sugar / purely steviol glycosides: Exempt

Heated Tobacco Products Excise Tax

Novel Tobacco Products Excise Tax

• Effective January 1, 2023: PHP 2.60/kilogram
• Effective January 1, 2024 onwards: specific tax rate shall be increased by 4% every year thereafter

Cosmetic Procedures

• RA 10963 introduces a new excise tax of 5% on gross receipts from services for cosmetic procedures, surgeries, and body enhancements
• Other changes include lowering estate and donor's tax, increasing allowable deductions on estate tax, expanding the VAT base, easing Bank Secrecy Law, increasing taxes on passive income and DST, and offering amnesty to taxpayers with deficiencies.

CREATE Law

• The CREATE Law aims to reduce corporate income tax to boost the economy, attract investment, and create jobs.

Tax Reduction Under CREATE Law

• Lowering of the corporate income tax rate from 30% to 20% for MSMEs, and from 30% to 25% for large businesses.
• Provides tax incentives for industries that are government priorities and simplifies tax filing.
• Example: A small business with PHP 5,000,000 revenue in 2020, under CREATE Law, the tax reduces from PHP 1,500,000 to PHP 1,000,000, saving PHP 500,000.

Benefits for Investors

• Investors benefit from lower taxes, a faster process for obtaining incentives
• The Philippines becomes perceived as a more attractive investment hub.

Regulations and Effects

• The law became effective on April 11, 2021 and was immediately implemented on July 1, 2020
• It helps businesses recover from the impact of the pandemic and attracts foreign investors to the Philippines.

Tax Reform Under CREATE Law

• Domestic corporations' tax rate reduced from 30% to 25%; which seeks to lessen the tax burden and increase corporate competitiveness
• For eligible domestic corporations, there is a 5% gross income tax option and the implementation of fiscal incentives and specific rewards to encourage investment.

Enhanced Tax Deductions & R&D Support

• Research and development (R&D) expenses are tax deductible and promotes technological development and innovation
• Encourages companies to invest in emerging technologies.

Streamlining & Modernization

• Streamlining & Modernization includes installation of electronic payment and filing systems, enhances productivity and lessens the administrative load
• Makes tax incentives more transparent and in line with international standards.

Income Tax Definition and Nature

• Income tax is levied on yearly profits from property, professions, trades, or offices, and on a person's income, emoluments, profits, and it is realized in one taxable year
• In the Philippines, it is governed by the National Internal Revenue Code of 1997 with varying rates based on the type of taxpayer, residency status, and income.

Gross vs. Net Income

• Gross income is the total revenue earned before deducting expenses
• Net income is revenue minus expenses, representing actual profit.

Key Principles of Income Tax

• The tax system follows the ability-to-pay principle, where those with higher income have a larger burden and only Philippine-sourced income of non-residents is taxed.
• The system aims for progressivity, ensuring higher earners contribute more.

Types of Income Tax

• Normal/Net Income Tax: Tax on income from trade/business
• Gross Income Tax: Tax on non-resident aliens' income
• Final Income Tax: Tax on passive income (interest, dividends, royalties)
• Withholding Tax: Tax withheld from employees' salaries
• Capital Gains Tax: Tax on gains from selling capital assets
• Percentage Tax: Tax on businesses not registered for VAT
• Value-Added Tax (VAT): Tax on goods and services sales
• Estate Tax: Tax on property transfer after the owner's death
• Donor's Tax: Tax on donations from individuals/corporations

Purposes of Income Tax

• Funding government programs, redistributing wealth, encouraging economic growth, and regulating private spending.

Requisites for Taxability of Income Tax

• There must be a gain or profit, whether in cash or its equivalent
• The gain must be realized or received, that it's actually transferred to an individual
• The gain must not be excluded by law or treaty and income must be recognized.
• Income is recognized when it has been received and revenue from services is recognized when services have been performed and are billable, recorded at the amount received or expected.

Income vs. Capital

• Income denotes a flow of wealth during a definite period and is subject to tax
• Capital denotes wealth itself at a point of time and isn't subject to tax
• Income is the fruit, capital is the tree