Summary
Republic Act № 10963 or Tax Reform for Acceleration and Inclusion (TRAIN) law is enacted by the Senate and House of Representatives in Congress (i.e. legislative), and is signed by the President[1] for compliance of all residents in the Philippines. The President has appointed Department of Finance for its effective implementation[2] while the Bureau of Internal Revenue issues the implementing rules and regulations and advisories to provide details on and clarify the implementation of the changes introduced under the TRAIN.
TRAIN is the first package of the Comprehensive Tax Reform Program (CTRP) aimed to redesign our tax system to be simpler, fairer, and more efficient for all, while also raising the resources needed to invest in infrastructure and Filipino people. Overall, the government sees a lesser tax burden of the poor and the middle class. Through TRAIN, every Filipino contributes in funding more infrastructure and social services to eradicate extreme poverty and reduce inequality towards prosperity for all. [3]
It addresses several weaknesses of the outdated National Internal Revenue Code (NIRC) which was adopted 20 years ago.Some problems encountered with this old tax law are (a) unfair and inequitable individual income tax system, (b) uncompetitive corporate taxation, (c) redundancy of nontransparent fiscal incentives resulting in incalculable revenues forgone (d) specific excise taxes that are not adjusted to inflation leading to revenue erosion (e.g. petroleum products), (e) low taxes for goods that impose a higher cost to society than what their prices show (i.e. alcohol, tobacco, unhealthy food), (f) well-intended laws that ironically abet tax evasion (i.e. law on secrecy of bank deposits), and (g) complex rules that enable tax avoidance and make tax compliance difficult.[4]
In a nutshell, TRAIN relatively decreases the tax on personal income, estate, and donation. However, it also increases the tax on certain passive incomes, documents (documentary stamp tax) as well as excise tax on petroleum products, minerals, automobiles, and cigarettes. It also imposes new taxes in the form of excise tax on sweetened beverages and non-essential services (i.e. invasive cosmetic procedures) and removes the tax exemption of Lotto and other PCSO winnings amounting to more than P10,000.[5]
Despite the good points of the TRAIN, several petitioners are against this reform and said it was not validly passed. According to Bayan Muna party-list Rep. Zarate, it violated the quorum requirement in Section 16 (2), Article VI of the 1987 Constitution and the requirement of a bill passed by Congress in Section 27, Article VI, among others.[6]
On the other hand, Laban Konsyumer, Inc. claimed that “the increase and/or imposition of excise taxes on coal, LPG, diesel, and kerosene are clearly violative of the basic principles and inherent limitations on Philippine taxation. The said provisions of the TRAIN Law are violative of the state and constitutional mandate for an equitable and progressive system of taxation, due process, and equal protection clause considering that the exorbitant excise taxes on these basic commodities stand to greatly impact and impose heavy financial burden on low-income and poor families.”
They also pointed out that “a sound tax system must take into consideration the taxpayers’ ability to pay, and thus, a tax law which runs contrary to this principle is void for being unconstitutional.”[7]
Similarly, members of the Makabayan bloc from the House of Representatives, together with the National Union of Peoples’ Lawyers (NUPL), told the high court that the House of Representative leaders committed grave abuse of discretion for ratifying the bicameral conference committee report for TRAIN “despite the glaring lack of quorum.”[8]
This was argued by Solicitor General Calida, saying that under the separation of powers, ‘courts may not intervene in the internal affairs of the legislature; it is not within the province of courts to direct Congress how to do its work.’[9]
Rationale of the TRAIN
Besides addressing the complicated and loopholed NIRC of 1997, the Government also wants to increase tax revenues to financially fuel projects like the Build, Build, Buildand in turn, alleviate poverty.
Think of this, the VAT rate of the Philippines is at 12%, which is five percent higher compared to Thailand’s. However, both collect the same VAT revenues due to the Philippines’ several tax exemptions. Thus, the “low rate and broad base” which is the goal of the Department of Finance (DOF), can be achieved by limiting VAT exemptions to necessities such as raw agriculture food, education, and health. TRAIN repeals 54 out of 61 special laws with non-essential VAT exemptions, but maintains VAT exemption for purchases of senior citizens and persons with disabilities.
To support residence and health, housing that costs below P2 million will be exempt from VAT beginning 2021, while medicines for diabetes, high cholesterol, and hypertension are already exempted this year.
The reform also limits the VAT zero-rating to direct exporters who actually export goods out of the country. This will be implemented together with an enhanced VAT refund system that will provide timely cash refunds to exporters. This is good for local businesses.
Similarly, the VAT threshold is increased from P1.9 million to P3 million to protect the poor and low-income Filipinos and small and micro businesses and for manageable administration. This effectively exempts the sale of goods and services of marginal establishments from VAT. Under TRAIN, VAT exempt taxpayers will have the following options:
· PIT schedule with 40% OSD on gross receipts or gross sales plus 3% percentage tax
· PIT schedule with itemized deductions plus 3% percentage tax, or
· Flat tax of 8% on gross sales or gross revenues in lieu of percentage tax and personal income tax.[10]
Lastly, TRAIN simplifies tax compliance which can mean more effective collection of tax revenues.
Significance of tax excise
The excise taxes are by themselves good taxes.
To correct for inflation, the increased tax rate on petroleum taxes has to be done. Since 1997, the specific tax on gasoline has not been adjusted to inflation. Worse, diesel is exempted from the excise tax, despite being the dirtier fuel. Now, hybrid vehicles shall be subject to 50% of the applicable excise tax rates, but purely electric vehicles and pick-ups shall be exempt from excise tax since they are less of a burden to the environment. Therefore, tax on oil products must likewise be seen as an ecological tax — a tax for the environment.
With regard to sugary beverages and tobacco, increasing excise taxes is an effective way to reduce smoking prevalence and unhealthy drinking. They are taxes for health.
But how about the impact of the increase in gasoline taxes and the expansion of the VAT base on the people’s spending?
First of all, the tax incidence analysis (e.g., on oil) shows that the non-poor will mainly pay for the higher consumption tax. In the case of the VAT, essential goods and services used by the poor and the vulnerable, like food in its raw state, medicines, and medical services, will still be exempted.
But more importantly, the TRAIN package includes social protection and transfer programs.
Part of the incremental revenue to be gained from the increase in oil taxes will be earmarked to improve and modernize public transportation and provide temporary subsidy for public transportation fares to mute the price impact.[11]
For the poorest 10 million households, the government is giving them unconditional targeted cash transfers of PHP 200 per month in 2018 and P300 per month in 2019 and 2020, sourced from higher consumption taxes that the rich will contribute, as well as better social services, healthcare, and education. All these will prepare the people for better job opportunities.[12]
Persons with disabilities (PWDs) will also benefit from cash transfers and expanded PhilHealth services. Senior citizens, specifically those with low income, will benefit from a socialized old age pension.
TRAIN is thus a most significant vector that will enable the Philippines to achieve its vision, as articulated in the National Economic and Development Authority’s AmBisyon 2040. In gist, by 2040, the Philippines has eradicated extreme poverty and has achieved per capita income comparable to the current status of prosperous Asian countries like South Korea.
While all these heroic acts of helping the poorest of the poor, the government is pressured to decrease poverty year after year or else there will be more mouths to feed than hands that do the hard work.
Public Health Impact
A. Tax excise: Sugary beverages and cigarettes
Right now, the unique health benefit from TRAIN is discouraging the consumption of unhealthy products such as sugary beverages and cigarettes.
These are positive contributors to the lowering of morbidity and mortality, considering that pulmonary diseases are leading morbidities in the country.[13] Also, by making unhealthy goods expensive, the risk factors are mitigated and the quality of life is improved (i.e. RA 8749 “Clean Air Act” is further supported by tax excise on cigars).
In turn, the increased taxes for cigarettes and sugar-sweetened beverages will support the DOH programs on the promotion of healthy lifestyles and the prevention and control of non-communicable diseases (NCDs). Philippines is the first country in Asia to introduce such a landmark tax measure which imposes a tax of P6.00 or P12.00 per liter on all sweetened beverages, depending on the type of sweetener used.
The additional resources generated by this measure may be utilized in subsidizing the national government’s health care reform agenda of providing universal health care to Filipinos. Revenues earned from the tax reform can be used to fund more benefits for Philhealth, and to address the costly and harmful consequences of consuming sugar-sweetened beverages which have constituted a major expenditure for Philhealth over the past decade. These include obesity-related diseases as well as diabetes and its complications such as stroke, heart attacks, and end stage renal disease (ESRD) which are now significant contributors to the overall burden of premature deaths and disability in the Philippines.
This action by the Philippine government concurs with the World Health Organization’s (WHO) call for member states to “make use of taxation measures raising by at least 20% the retail price of sugary drinks to influence the purchasing and dietary choices of their populations” as mentioned in the official WHO report issued in October 2016. [11]
However, it would also be quite short-sighted to attack just the sugary beverage industries and let other unhealthy foods go. Junk foods take many forms and are equally a burden to the health of the nation.
Thus, in order to really achieve the goal of fending off unhealthy diet, the list must be extended to include other high carbs and high-fat foods in the future. Sadly, the increased cost of cigarettes still has little effect to the numbers of smokers — smoking in undesignated places is still a stunt that can be pulled off without penalty even with the EO no. 56 in place.
B. Tax exempt: Drugs for hypertension, high cholesterol and diabetes
The DOH lists hypertension as the fourth leading cause of morbidity, while diseases of the heart and the vascular system are the first and second causes of mortality in 2013, respectively. Diabetes is ranked 6th.
Therefore, the VAT exemption on sale of drugs and medicines prescribed for the treatment and/or prevention of diabetes, high cholesterol and hypertension is another helpful feature of TRAIN. It is under the mandate of R.A 9502 also known as Universally Accessible and Cheaper Medicines Act of 2008. The joint administrative order (JAO) no. 2–2018 provided the implementing guidelines to delineate the roles of DOH, DOF, BIR, and FDA. This provision helps patients complete their prescriptions and be more willing to take their maintenance medicines at the right period of time.
Duque said that the policy is expected to address the country’s problems on non-communicable diseases that are addressed by the drugs covered by the exemption. The said medicines are the most common maintenance medications for which a lot of the people are spending a lot of money.[14]
According to JAO no. 2–2018, however, the importation of the said drugs are not tax exempted. This may cause problems in the procurement process since most of our drugs are either generic or are of imported brands. While data shows that 65% of pharmaceuticals sales are from generics [15], the exclusion of imported drugs from the TAX exemption means that the law is half-baked. Not all people who favor branded generics are non-poor.
There is also worry that the drug tax-exemption will hurt the pockets of those suffering from other diseases (e.g. asthma) by transferring the price burden to medicines not included in the list. Of course, this issue must still be investigated and verified, but it is certainly avoidable if the government is actively reinforcing the Essential Drug Price Monitoring System.
Regardless, there is undeniable benefit for the patients suffering from diabetes and hypertension. The stakeholders may experience certain profit loss but stability of the economy is normally not immediate. As the tax exemption is narrowed in order to accommodate lower tax rates, the new rules will disturb the existing business — particularly those that are of industrial in nature. With the Build, Build, Build movement of President Duterte, the tax excise on mineral products, fuel and automobiles might be a counteracting law. Likewise, there is a distant effect of this excised tax to the healthcare since hospitals and other institutions are powered by the same materials (i.e. petroleum and fuel used in generators and ambulances). The effect will be most felt by the patients and their relatives.
Therefore, the tasks of the Pharmaceutical Division of the DOH must be taken seriously. Monitoring and studying the impact of this vax exemption on the affordability and access of medicines for patients must be research-driven and fact-based in order to support re-evaluation and removal of certain “unfruitful” parts of TRAIN.
The favor towards hypertension and diabetes programs is not new. In fact, last January 2016, the Department of Health (DOH) started providing those suffering from diabetes and hypertension — two interrelated conditions — with free daily maintenance medication to help ease the burden of out-ofpocket medical costs, especially among the poor. These free medicines, metformin, losartan, amlodipine and metoprolol, are given monthly.
NCDs such as cardiovascular conditions and diabetes remain the top causes of death in the Philippines. Based on DOH records, at least 33% of deaths nationwide are related to heart diseases, 10% to cancer, 6% to diabetes and 5% to chronic respiratory diseases. According to Former Health Secretary Garin, one million Filipinos with diabetes and three million others with hypertension would benefit from the program although it would be limited to members of the DOH Hypertension and Diabetes Club.
To become a member, patients must go to the nearest health center or primary health care facility to undergo assessment, screening and management using the Philippine Package of Essential NCD (noncommunicable disease) Intervention protocol. Aside from the free medication, club members will also enjoy activities that promote a healthy lifestyle to control blood pressure and sugar levels and prevent further complications.
That is why one can appreciate the 2019 vat exemption since availing these price reductions doesn’t require a patient to enroll himself in a program first — thereby increasing his access to medicines.[16]
Final thoughts
As part of the allied medical professions, seeing the government continuously express its support to the nation’s health by including lifestyle-changing and pharmaceutical-centered provisions is already breakthrough. TRAIN law is undeniably a holistic approach towards improving the Philippines and is outright in favor of the less fortunate. As early as 2019, some major features are already implemented phase by phase through the coordination of many agencies like DOF, DOH, BIR, and FDA. While certain groups are against TRAIN’s implementation, we should appreciate its immediate benefits like tax exemptions, and look forward to long-term profits in the form of lower morbidity and mortality cases, and higher GDP and tax revenue numbers. Lack of knowledge, fear of change, and force of habit are some of the foreseeable hindrances to the acceptance of TRAIN, but we must remember that even great countries like Britain have to welcome system changes to become better.
To ascertain the validity and confirm the benefits of TRAIN, the importance of monitoring and evaluating its impact must be underscored, too. With this, certain parts of the law may be revised and/or removed based on sound evidence. Will the poor and middle-class really benefit, or is this just another seesaw case? The data will speak.
Ultimately, the success of this new law is really not just about the agencies doing their roles but also calls for the nation’s collective effort. Yes, the richest of the richest may not care about their soaring taxes, but nobody is delighted to see their fortunes being put to waste and not benefiting them in a way. In the same way, the poor must also be motivated to work harder to improve their status, and not take advantage of the incentives for the rest of their lives.
The Philippines is already setting its eyes to a progressive 2040. Dealing with the tax reform is one of the essential feats that we must dare to face.
References
[1]https://www.bir.gov.ph/images/bir_files/internal_communications_1/TRAIN%20matters/RA-10963-RRD
[3]http://www.dof.gov.ph/taxreform/#train
[4]http://aer.ph/significance-of-the-comprehensive-tax-reform-program-aka-train/
[5]https://www.rappler.com/thought-leaders/192873-train-tax-reform-law-what-does-it-change-explainer
[7]https://news.mb.com.ph/2018/05/01/state-lawyers-ask-for-dismissal-of-2-petitions-vs-train-law/
[9]http://www.dof.gov.ph/taxreform/index.php/e-vat/
[10]TRAIN simple presentation
[11]http://aer.ph/significance-of-the-comprehensive-tax-reform-program-aka-train/
[12]https://www.doh.gov.ph/node/12254
[13]https://www.doh.gov.ph/morbidity
[14]https://www.philstar.com/headlines/2019/01/05/1882507/doh-pharmacies-exempt-maintenance-meds-vat#RoW8OCFUsj2hQQGM.99
[15]https://news.mb.com.ph/2017/03/17/65-of-pharmaceutical-sales-are-generic-medicines-doh/
[16]http://newsinfo.inquirer.net/747630/doh-offers-free-medicines-to-diabetics-hypertensives
